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Stock Strategist

The Battle Over Capital Allocation at Transocean

Transocean faces some interesting dividend and director proposals at its May meeting.

Mentioned:

 Transocean (RIG) CEO Steven Newman just can’t catch a break. Only a month into the job, he faced the Macondo blowout, and dealing with the aftereffects has consumed most of his time during the past few years. Now, after a string of successes in the past few quarters, Newman has to deal with activist investor Carl Icahn’s demands, which include a dividend of $4 per share and the replacement of three board members. In our view, Icahn’s demands threaten to derail a series of balance sheet and operational improvements during the next few years that we believe will create significant long-term shareholder value. This battle is crucial for Transocean, because it revolves around one of the most pressing issues for the firm today: Newman’s efforts to create shareholder value, which include capital allocation.

Icahn’s Strategy
Icahn is correct in two respects: Transocean can support a decent-size dividend while meeting its fleet reinvestment needs, and shareholders would likely benefit from a de-staggered board where all members are up for election every year instead of over several years. Beyond these two issues, we think little of Icahn’s proposals, as they show a questionable understanding of the dynamics of the offshore drilling space, Newman’s decision-making abilities, and his capital allocation efforts.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.