The Tortured History of the Transocean Dividend
NEW YORK (TheStreet) -- If eliminating the $1 billion annual dividend was the right move for Transocean(RIG) management team to make, it was a right move that once again highlights the suspect course the company is on.
Transocean said Monday its board won't recommend a dividend payment in 2012. The company is incorporated in Switzerland, where Swiss law requires the dividend to be voted on annually.
With the board stating it does not want to pay a dividend in 2012, shareholders have little hope of mounting a successful proxy challenge by proposing a dividend as a separate issue for Transocean's annual meeting.
Monday seemed to be the day for Swiss-based oil service companies to release bad news, as Weatherford International(WFT) said on Monday -- in not releasing earnings details for the fourth quarter 2011 -- that it still can't figure out exactly what it did wrong in its last four years of financial statements, almost exactly a year after announcing it had uncovered weakness in internal controls.
Transocean shares declined by 3% on Tuesday on elevated volume after its dividend announcement.
There may have been some investors who were surprised by the dividend being pulled, but they shouldn't have been. Given the trouble the stock has run into in the past six months, with its operating costs rising and its credit rating unstable, most analysts felt killing the dividend was the prudent financial decision.
In fact, the larger history of the Transocean dividend is tortured. Shareholders pressured Transocean management for years to pay a dividend, but management was reluctant to offer one.
As far back as 2009, Omega Advisors CEO Leon Cooperman, among the better known U.S. hedge fund managers, was referring to his call for a Transocean dividend as a broken record. Cooperman is one of the largest holders of Transocean shares and was often on quarterly conference calls pounding management over the lack of a dividend given the strength of its balance sheet.
Transocean management finally relented and said it would offer a dividend in 2010, just as the Macondo well was getting ready to blow, giving it one more way -- albeit an unwelcome way -- to stall on the dividend. Transocean finally added that dividend in 2011. It turned out to be a brief life.
Transocean shares are now down nearly 40% in the past year and in late 2011 the two major rating agencies, Standard & Poor's and Fitch, began discussing Transocean in junk bond terms. The negative ratings outlook coincided with a $1 billion debt offering in November, when S&P rated the deal BBB- and put the company on "negative" outlook.
At the same time as the debt deal, Transocean issued 26 million shares in a secondary equity offering. At the time of the secondary offering, Transocean shares were near an all-time low, not the typical time for a dilutive equity offering.
None of that is news to investors, though. In fact, Transocean comes up on a popular bankruptcy risk stock screening metric.
Transocean said in its decision to kill the dividend that it had to focus on the balance sheet and credit rating before returning cash to shareholders.
RBC Capital Markets said Tuesday that with less cash flow from operations in 2011 than expected and the acquisition of Aker Drilling ratcheting up debt in 2011, the prudent move was to focus on the financial issues.
The decision does suggest credibility issues for Transocean management will continue, though.
Argus Research analyst Phil Weiss said, "Remember that this is a management team that decided to issue stock when it was trading close to a seven-year low. That's certainly not a shareholder friendly move. They also maintained that they set a dividend at a level they viewed as sustainable and it only lasted a year. To me, this is a management team with a credibility problem. This is further evidence of why."
John Keller, analyst at Stephens, said Transocean had referred to its dividend as sustainable and he thinks the move to stop the payment wasn't necessary.
According to his model, Keller believes that, barring a huge payout to BP(BP) in a Macondo settlement, Transocean could afford to go on paying the dividend even with its current cash concerns.
Keller said he understands the heightened level of caution and choice to the eliminate dividend, with the company clearly incurring more costs than it had anticipated and the Macondo liability still an issue. He said smart investors were already baking into shares the idea that the dividend wouldn't happen, or would at least be cut in 2012.
"It's been a challenging couple of quarters with less cash generation than they would like," the analyst added.
In the big picture though, Weiss of Argus Research said, "To me, while it makes management look bad, eliminating the dividend is the right course to take. You don't issue stock, borrow money and pay a dividend all at the same time."
For investors, the opportunity to trade Transocean as a dividend stock isn't gone for good. It's a dead issue for 2012, but it could be a trading trigger to keep on the back burner for 2013 and beyond.
With Swiss law structured to make the dividend an annual voting issue, an improvement in the company's operating business and a stable credit rating could bring the dividend back into play. The company said as much in its release this week, saying that with a stronger balance sheet and stable credit rating, returning cash to shareholders will be a priority.
With the caveat of a management team that had to be dragged kicking and screaming to a dividend in the first place, "I do expect it will ultimately be reinstated, but not until they get through the operational issues they've been experiencing," Weiss said.
Maybe the best thing for investors to do is to monitor Leon Cooperman's questions on upcoming Transocean conference calls for a signal that the dividend could return in 2013.
Transocean shares had been on a tear in 2012, rising more than 30%, and so falling by 3% on Tuesday, it seems the dividend yanking was well-telegraphed and no longer the reason to buy the stock anyway.
Dahlman Rose analyst James Crandell wrote, "This is one of the three primary risks that we had identified in owning the stock and is not surprising in our view." Crandell added that he would buy shares on weakness.
If Transocean, much like its Swiss counterpart Weatherford, remains a value play, investors would do well to remember that the company's recent management decision-making suggests a less than smooth ride for shares.
-- Written by Eric Rosenbaum from New York.
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