Transocean Ltd. (RIG:US), the owner of the Deepwater Horizon rig that exploded while drilling in the U.S. Gulf of Mexico in 2010, reinstated dividend payments following pressure from billionaire shareholder Carl Icahn.
The board will recommend an annual payout of $2.24 a share, about $800 million in total, and boost debt repayments by retiring another $1 billion by the end of next year on top of current payment obligations, Transocean said today in a statement. The Vernier, Switzerland-based company, which had $5.13 billion in cash at the end of 2012, stopped payments a year ago to defend its investment-grade credit rating and maintain a “strong, flexible balance sheet.”
Icahn, Transocean’s largest shareholder with a 5.6 percent stake (RIG:US), still expects to propose a $4-a-share dividend at the company’s annual meeting, Icahn said in a federal filing today following the company’s announcement. He will offer “at least” three new board members. Before last year, the company paid (RIG:US) out $3.16 annually to stockholders.
“Transocean’s recent announcement further highlights a long track record of weak capital allocation strategy,” Icahn said in the filing. “It is astounding to us that the board would authorize debt repayments which will make no material impact to earnings as opposed to authorizing an additional $1.76 per share dividend to shareholders.”
Transocean’s dividend announcement follows the start of a trial in New Orleans to determine liability for the explosion at the Macondo well, which resulted in the largest offshore oil spill in U.S. history. Transocean won court approval on Feb. 19 for a $1 billion settlement of claims it violated the U.S. Clean Water Act.
“The board’s decision to recommend a payment for 2013 is based upon the consideration of multiple factors relevant to the company’s business, including remaining uncertainties related to the Macondo well incident,” Transocean said in an earlier statement.
Transocean should target a permanent dividend that “approaches a minimum” of 85 percent of net income, Icahn said. Transocean is expected to earn $4.79 a share this year, according to the average of 28 analysts’ estimates (RIG:US) compiled by Bloomberg, and $6.10 in 2014, according to 22 analyst estimates.
The company wasn’t immediately available to comment on Icahn’s latest filing.
“While it is not the full $4/share for which Carl Icahn is advocating, we believe it is large enough to satisfy many shareholders while maintaining balance sheet flexibility,” J.B. Lowe and James Crandell, analysts at Dahlman Rose & Co. in New York, wrote today in a note to investors.
Transocean rose 0.1 percent to $52.19 at the close in New York. The shares have gained 17 percent this year.
Tranocean’s previous stance was that the dividend would resume in 2014, Brian Uhlmer, an analyst at Global Hunter Securities LLC in Houston, wrote today in a note to investors.
This decision “now suggests to us that it is more comfortable with internal and operational controls, as well as the recent progress made with respect to the Macondo settlement agreements,” he wrote.
Transocean is “quite seriously” evaluating whether to put as many as three ultra-deepwater rigs into a partnership and sell shares, Chief Financial Officer Esa Ikaeheimonen said on a conference call today. Ikaeheimonen worked at Norway’s Seadrill Ltd. (SDRL) when that company put some of its drilling rigs into a partnership.
Icahn’s director nominees will be able to assist the Transocean board in evaluating and executing on a financing structure similar to a master limited partnership, according to the filing.
The company last week reported a fourth-quarter profit for the first time since 2009 as added drilling in the Gulf of Mexico helped boost rig demand.
Transocean posted net income of $456 million, or $1.19 a share, compared with a loss of $6.17 billion, or $18.67, a year earlier that followed a writedown on the value of its contract drilling business.
The blowout and explosion aboard Transocean’s Deepwater Horizon rig in April 2010 spilled more than 4 million barrels of oil into the Gulf. The accident sparked hundreds of lawsuits against London-based BP Plc (BP/), the oil company that hired the rig, Transocean and Houston-based Halliburton Co. (HAL:US), which handled cement work on the well.
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