Earlier this week, Transocean, the largest offshore driller, slashed its annual dividend to $0.60 per share from the earlier payout of $3 per share. The move – which was inevitable given the challenging conditions in the offshore drilling markets – should help the company better manage its liquidity and will also support the company’s objective of retaining its investment grade credit rating (related: Why A Dividend Cut May Be Inevitable For Transocean).
See Our Complete Analysis For Transocean Here
Trefis has a $25 price estimate for Transocean, which is significantly ahead of the current market price. We will be revisiting our price estimate after the company’s earnings release on February 25.
Transocean's operating cash flows are likely to come under significant pressure this year, as the global supply of ultra-deepwater rigs continues to grow even as oil and gas companies scale back their rig rental expenditures amid the weak crude oil pricing environment (related: How Transocean's Key Metrics Are Being Impacted By The Offshore Downturn). This is likely to put significant pressure on the company's liquidity position given its high debt load and its large capital expenditures. The company has roughly $1.2 billion in debt maturing this year and its preliminary capex guidance for FY 2015 stands at $1.9 billion (largely related to milestone payments for its new build program). While the company has a relatively healthy cash position – which stood at $2.87 billion as of Q3 2014 – continuing to pay dividends to the tune of $1.1 billion per year would have been unsustainable, and likely would have hurt the company’s credit rating. The previous dividends were also not optimal from a capital allocation standpoint. The company's stock price is down by close to 55% over the past year and its trailing twelve month dividend yield – with the $3 dividend – would stand at over 15%, which is well ahead of the cost of capital. The new dividend translates into a prospective yield of 3%, based on Transocean's share price of $19.05 at Tuesday’s close.
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