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Fede Zaldua
Fede Zaldua
Articles (96) 

Icahn Did It Again

November 12, 2013 | About:

This week, Transocean (NYSE:RIG) announced an agreement with the Icahn Group, which owns around 6% of the company's shares. This means that Carl Icahn has successfully forced Transoceanto take some of the actions the billionaire investor has been claiming for a while. The changes that Icahn forced were mainly three:

  1. A 33% increase in Transocean's cash dividend up to $3 per share from $2.24 per share (Icahn had been asking for $4 a share).

  2. A reduction in the maximum number of directors on its board from 14 to 11, making each vote much more important now than before. In addition, the company agreed to add Vince Intrieri as a nominee who would be Icahn’s second member on the board of directors.

  3. A plan for an initial public offering (a carve-out) of the company's steady income producing assets into a Master Limited Partnership (MPL), which could be completed as soon as mid 2014.

    The investor applauded the moves proposed by the company. Should you now buy Transocean along Carl Icahn?

A Commoditized Business

According to Transocean, which is the world's biggest deep-water driller, offshore drilling is a commodity business. Hence, as in all commodity-related businesses, focus should be set into driving down costs and focusing on the business segments that carry better margins.

Partly thanks to Icahn's proxy fight with the company, the driller is doing moves aimed at increasing cost efficiency and driving gross margins up. As a matter of fact, Transocean's management has targeted an incremental $500 million in cost savings by the end of 2015. Those savings would equate to $1.35 in earnings per share (EPS), which is a huge effort for a company which was believed to be unable to attain EPS above $5.

That said, those efforts should just be the start of a long cost-cutting journey. Besides cost-cutting efforts, I would also expect a rapid fleet modernization to help drive margins in line with Transocean's peers such as Noble (NYSE:NE): Transocean's EBITDA margins stand around 40%, well below Noble's 50% EBITDA margins.

Multiples Can Be Volatile in a Business Which Is Changing

When we look at Transocean's multiples, at first sight, they don’t look extremely cheap. The company trades at 9.4 times 2014 earnings and 6.1 times EV/EBITDA while Noble, being more profitable, sells for 9 times 2014 earnings and 5.7 times EV/EBITDA. That said, extremely efficient drillers such as Noble (which has been slashing costs for a while) can not afford to keep on cutting expenses. Meanwhile, Transocean still has the lowest margins among large drillers. The 10% EBITDA margin gap between those two drillers give us an idea of how much work remains to be done in Transocean's case.

On the other hand, while you wait for Transocean to become more efficient, you can enjoy its 5.4% cash dividend yield (Noble pays a 2.5% cash dividend yield), which I expect to keep on increasing as the company grows its EPS figure. If you buy Transocean's shares you will not be alone next to Carl Icahn; other great investors such as Leon Cooperman, Joel Greenblatt and Ray Dalio have also disclosed long positions in this ameliorating offshore driller.

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