Ican s new stake in Transocean Ltd. (RIG) may raise pressure
on the world’s largest offshore driller to put some of its rigs into a
tax-advantaged partnership as the billionaire seeks to boost his investment’s
value.
Transocean’s announcement this week that Icahn bought 1.56
percent of its shares and sought regulators’ permission to own more than
3 percent stirred a debate in the investment community as the activist investor known for shaking up companies remained silent about his intentions. He’s jumping in less than two weeks after Transocean agreed to pay the U.S. $1.4 billion to settle its liability in the 2010 Gulf of Mexico oil spill.
3 percent stirred a debate in the investment community as the activist investor known for shaking up companies remained silent about his intentions. He’s jumping in less than two weeks after Transocean agreed to pay the U.S. $1.4 billion to settle its liability in the 2010 Gulf of Mexico oil spill.
Transocean’s announcement this week that billionaire Carl
Icahn bought 1.56 percent of its shares and sought regulators’ permission to
own more than 3 percent stirred a debate in the investment community as the
activist investor known for shaking up companies remained silent about his
intentions.
With the company already in turnaround mode -- the shares
have led peers with a 34 percent gain over the past year -- some investors and
analysts said they expect the 76-year-old to push for Transocean to create a
master limited partnership, or MLP, to raise cash for the parent company and
spur growth with its tax-free structure. It would be the second drilling-rig
partnership after Stavanger, Norway-based Seadrill Ltd. (SDRL) spun off assets
to create Seadrill Partners LLC (SDLP) in October.
“I would guess he’s going after an MLP because there aren’t
a whole lot of other levers to pull,” Joe Hill, an analyst at Tudor Pickering
Holt & Co. in Houston said in a telephone interview.
Icahn didn’t return repeated calls and e-mails to his office
requesting comment on his investment in Vernier, Switzerland-based Transocean.
MLP Considered
Transocean said it was studying the possibility of forming
an MLP when asked about it after Seadrill’s spinoff.
“It’s certainly interesting,” Greg Cauthen, the company’s
former interim chief financial officer, told analysts and investors Nov. 6.
“It’s something we have and will continue to look at, but we’ve not come to any
conclusions at this time.” Cauthen was succeeded a week later by Esa
Ikaeheimonen, previously the chief financial officer at Seadrill, a move that
was announced in September.
Transocean isn’t saying much about the Icahn investment, other
than an e-mailed statement Jan. 14 that it “looks forward” to talking with him.
Icahn notified the company that he’s seeking regulatory approval to potentially
acquire shares worth more than $682.1 million, Transocean said in a statement
on its website the day before.
Shares in Transocean gained 1.6 percent to $54.76 in New
York at 10:36 a.m. local time, headed for their biggest gain in four days.
Creditors’ Concern
The move by an activist investor known for pushing companies
for change added enough uncertainty to concern creditors, with Transocean bonds
reversing gains posted after its oil spill settlement was announced Jan. 3. The
company’s $1 billion of 6.8 percent notes due March 2038 fell 2 cents to 121
cents on the dollar, yielding 5.27 percent at 4:31 p.m. in New York, according
to Trace, the bond-price reporting system of the Financial Industry Regulatory
Authority.
The rig contractor has made progress in shoring up its
balance sheet after losing more than half its market value following the April
2010 oil spill, Collin Gerry, an analyst at Raymond James said in a telephone
interview.
Earnings before interest, tax, depreciation and amortization
are expected to almost double in 2012 to $3.39 billion from $1.85 billion a
year earlier, according to 39 analysts’ estimates compiled by Bloomberg. The
Ebitda is expected to climb another 39 percent over the next two years, and for
the first time since 2008, the company is expected to increase revenue in 2012
to $9.7 billion.
Transocean also is improving its fleet, having sold most of
its standardized shallow-water drilling rigs for $1.05 billion, and started
building nine new rigs, most of which should be able to command some of the
highest day rates in the industry and work in waters as deep as 12,000 feet.
Macondo Settlement
The settlement with the U.S. Justice Department over
Transocean’s role in the explosion of the Macondo well and subsequent oil spill
calls for the company to pay $1.4 billion over five years, a payment schedule
that Argus Research analyst Phil Weiss said in a Jan. 9 note to investors was
“certainly manageable.”
After turning in the best performance among peers on the
Philadelphia Oil Service Sector Index (OSX) over the past year, the company
still has room to grow. The stock is trading at about 85 percent of the
company’s net-asset value, compared with the 10- year average of more than 100
percent for the industry group, West said.
“It’s extremely undervalued, which is a classic Icahn
trade,” said Laurence Balter, who helps manage $100 million, including
Transocean shares, at Oracle Investment Research in Fox Island, Washington.
CVR Partnership
CVR Energy Inc. (CVI), an oil refiner Icahn took control of
last year after winning a proxy fight with management, is scheduled to hold a
$520 million initial public offering today to create an MLP with the company’s
two oil refineries. Icahn is poised to double his $2 billion investment in CVR
thanks to the restructuring and cheaper U.S. oil that has widened profit
margins for refiners.
CVR reached $53.19 at the close of New York trading
yesterday, the highest since the company was taken public in 2007 at $19 a
share by Goldman Sachs Group Inc.
MLPs pay no U.S. corporate income tax and distribute cash to
holders of partnership units, which are traded like shares in a public
corporation. MLPs are usually controlled by a general partner that retains a
share of the units and receives a portion of the income. Retail investors have
favored the MLP model in the pipeline industry because they tend to pay steady
dividends tied to long-term contracts that are often akin to rent.
MLP Expansion
In the past year, more oil and natural gas producers and
refiners have been attracted to the model. Now, with most major rig owners
mulling the idea, Scott Gruber, an analyst at Sanford Bernstein dubbed the
topic “MLP Mania?” in a note just after Seadrill announced the IPO of Seadrill
Partners.
MLPs don’t create value for foreign-domiciled drilling
companies such as Transocean and Seadrill because there’s no tax-efficiency
gain, Gruber said in a telephone interview. That’s why Seadrill ultimately went
with a limited- partnership structure instead of an MLP, he said.
The reason why Seadrill Partners trades at a premium is
because of its payout to unit-holders. That same effect could be accomplished
at Transocean by bringing back the dividend, he said.
Seadrill gave its partnership a partial interest in four
drilling rigs with long-term contracts operating in North America and West
Africa. Since it began trading Oct. 18, the parent company has fallen 10
percent while Seadrill Partners has climbed 26 percent.
Transocean is viewed as under-valued compared to Seadrill at
the time of its spinoff, James West, an analyst at Barclays Capital said in a
telephone interview. So shares may gain with the cash from an MLP’s unit
distributions and improved forecasting for cash-flow from long-term rig
contracts, he said.
Still, the arguments for a Transocean MLP are less
convincing, according to Tudor Pickering’s Hill.
Value Questions
“It’s fine to do one as an experiment, but I’m a little
skeptical they’re going to get a big value uplift from doing one,” Hill said.
Balter sees an MLP structure as a quick boost to shares of
the parent company in the beginning, though ultimately a “cop out” because the
structure may take away some of the best assets from the larger company, he
said.
“I would not be surprised to see them go the MLP route,”
Balter said. “But I would be disappointed that the industry is trending this
way, just for the sake of raising the share price.”
Alternatively, Icahn may just focus on pushing the company
to cut costs, reduce debt, sell older vessels and reinstitute the dividend,
Gruber said.
“A year ago, you could see some incremental pockets of value
in squeezing some stuff out, but now some of those have been resolved and
you’re left wondering, ’What’s left for him to really change?” Gerry said.
“Maybe it’s the MLP structure.”
Source:
Bloomberg
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