Transocean seems to be bobbing around its 52-week low. Given that I was blowing the horn about buying Transocean when it was $54, I must be pretty happy to see it trading at around $44 now (an almost 20% discount).
But things have changed in the last few days. I will first mention some of the press release from Transocean during these months.
- October 4, 2011: Transocean acquired Aker Drilling for NOK 26.50 per share or $1.43 billion. This acquisition further strengthens Transocean's industry leadership position, adding approximately $1 billion in backlog as well as Aker's two harsh environment, semi-submersible drilling rigs and two drillships under construction in Korea.
- November 10, 2011: Transocean announced the schedule for the third installment of its dividend of approximately U.S. $1 billion to be paid out of additional paid in capital. The third installment is $0.79 per outstanding share, or approximately $252.7 million in total, based on the current number of the company's outstanding shares.
- November 16, 2011: Transocean announced that holders of the 1.50% Series B Convertible Senior Notes due 2037, have the option to require Transocean to repurchase on December 15, 2011 all or any part of such holder's notes. If all outstanding notes are surrendered for repurchase, the aggregate repurchase price will be approximately $1.7 billion. Transocean intends to fund the repurchase price by using available cash.
- November 29, 2011: Transocean announced that it has priced its previously-announced public offering of 26 million of its shares at a public offering price of U.S. $40.50 per share, or 37.32 Swiss francs per share. Transocean granted the underwriters a 30-day option to purchase up to an additional 3,900,000 shares at the public offering price (less the underwriting discount) solely to cover over-allotments, if any. Net proceeds to Transocean from the sale of the 26,000,000 shares, after underwriting discounts, estimated offering expenses and the Swiss Federal Issuance Stamp Tax (Emissionsabgabe), will be approximately U.S. $1,008 million. Transocean intends to use the net proceeds from this offering to partially refinance its acquisition of Aker Drilling ASA, which was initially financed through the use of available cash and the assumption of Aker's outstanding debt. In particular, this offering will replenish cash that would be applied to the expected approximate $1.7 billion in aggregate repurchase by Transocean Inc. of its 1.50% Series B Convertible Senior Notes due December 2037. The offering represents up to 8.9% of Transocean's total issued and outstanding shares.
- November 30, 2011: Transocean announced that its wholly-owned subsidiary, Transocean Inc., priced a public offering of $1.0 billion of 5.050% Senior Notes due 2016, $1.2 billion of 6.375% Senior Notes due 2021, and $300 million of 7.350% Senior Notes due 2041.
Let me describe the situation in my own words now.
- Till the end of November executives were saying that the Aker deal will go through with cash on hand and some additional debt.
- They jumped through hoops to get the $1 billion dividend passed amid controversies due to the Mocando well liability. The Swiss were against the dividend payment and the Transocean management did some serious legal maneuvers to get it passed.
- They paid back the $1.7 billion debt yielding 1.5%.
- They announced dilution of 8.9% in the share capital for $1 billion.
- They took additional debt of $1 billion of 5.050%, $1.2 billion of 6.375% and $300 million of 7.35%. So, a total of $2.5 billion debt.
They would have needed $1.4 billion for the Aker acquisition and additional $1 billion paying the 1.5% debt due in december. It seems that taking additional debt to pay down $2.4 billion would have resulted in a downgrade and a subsequent increase in the interest it would have needed to pay for the debt. I assume that they needed to increase the equity to avoid downgrade of the debt which would have increased the yield. In the end, it might end up saving money for Transocean. But given how management went through legal maneuvers to pay the $1 billion in dividend which is precisely what it would have needed to avoid the equity offering, it raises serious questions on their ability. Couple this with increasingly stupid forecasts the management seems to be making about the recovery of the market and the day rates since a year can make any shareholder worried. This company have assets and the market working for it, but with incompetent management, everything may come to nothing. We see Seadrill (SDRL) which seems to be beating forecasts quarter after quarter and Transocean (RIG) which can’t even get the forecast right by a long shot !
As a long term investor though we must not buy and sell in a panic. To see if we should still invest or cut our losses and run, we must ask ourselves about the things we saw while investing in Transocean. My article gave the following reasons for the investment
- Transocean is the market leader in deepwater drilling. They have the necessary expertise and competitive advantage to be the go-to driller for ultra and deepwater drilling.
- Transocean is undervalued relative to its peers and even trades below it tangible book value.
- Transocean has a good balance sheet and a good management.
Have any of these points compromised by the recent developments ? Apart from a question mark on the management, I do not see any of the original points muted. Transocean still has the competitive advantage and is undervalued relative to its peers.
Transocean has struggle through rig downtime in 2011 and there a multiple factors which are going against it at the moment. Its deepwater drill is older than the peers (we already noted this in the previous article). The Mocando well liability and the subsequent legal battles have also distracted the management. I must say though, if these developments have shaken your belief in the management then you can cut your losses and run, but I for the moment am giving them another chance.
In addition, Transocean’s CEO Steven Newman bought 6,500 shares on December 5. His direct stake in the company now stands at 26,810 shares. I still peg the shares at $65 a piece (one can run a DCF valuation or a tangible book value valuation). Hence, I am buying more while the market is dropping.
Additional disclosure: I am long Transocean.