Transcocean Ltd: Turnaround Play

Transcocean Ltd (RIG) is one of the largest offshore drilling contractors in the world. The company rents floating mobile drilling rigs, along with the equipment and personnel for operation for oil and gas companies. Transcocean day rate range from $287,700 to as high as $650,000 for its deepwater drillships. The company has over 135 offshore drilling units and two ultra-deepwater units undercontruction as of 2011. It owns nearly half of the 50 deepwater platforms in the world. 

Company History 

The company traces its roots back to 1953, when the Birmingham, Alabama based Southern National Gas Company that created the Offshore Company after acquiring a joint drilling operation. In 1954 the company launched its first Jackup rig in the Gulf of Mexico and went public in 1967. In 1978 SNG turned the company into a wholly-owned subsidiary. The name of the company was changed to Sonat Offshore Drilling Inc. Sonat spun-off the company in 1993 and in 1996 it was a acquired by Nowegian group Transcocean ASA for $1.5 billion. Transcosean started in the 1970's as a whaling company and expanded its business beyond whaling through a series of mergers. The company called its new acquisition Transcocean Offshore and the new company began to building massive drilling operations with drills capable of going 10,000 feet. It first ship the Discoverer Enterprise cost nearly $430 million dollars, could operate two drills and is the largest of the drill ships. In 2002 Transocean acquired R&B Falcon for $17.7 billion. That acquistion gave the company control of what at that time was the world's largest offshore operation. 

Turnaround 

The company earnings have floundered during the last two years, and has begun to turn its around. It when from losing $5.7 billion in 2011 and losing $219 million. The company has been struggling due to over aged rigs, decreases in day rates for their drilling rigs, and its involvement with the BP oil spill. It has turn it around by be profitable in each of the first three quarters of 2013 and reporting a net income $1.7 billion. In the third quarter of 2013 the company reported revenues of $2.56 billion up from $2.43 billion in the third quarter of 2012. The company net income was $546 million up from $-381 million in the same third quarter of 2012. It day rates have increased from $376,200 per day to $392,000 per day. It decreased it debt by $2.92 billion and saw a free cash flow of $237 million. 

Activist Investor 

Starting in 2013, activist investor Carl Icahn (Trades, Portfolio) accrued about $1.15 billion stake of of the company accounting for about 6% of of the company's shares outstanding. Carl Icahn(Trades, Portfolio) started his campaign to get Transocean to change by increasing shareholder dividends from $2.24 dollars to $4.00 per share. On Nov. 2013 the company proposed to raised its dividends to $3.00 per share to be paid in 2014-2015. The second change Icahn wanted was for the company to change its business plan. He wanted to increase to the company's margins by increasing cost cutting measures by 2015 to $800 million and the board agreed to do that. The third and final change he wanted was for the company to spin-off some of the company's assets into a master limited partnership. It gave into Carl Icahn (Trades, Portfolio) and agreed to do a initial public offering for an master limited partnership in 2014. 

Valuation

Transocean is sell not just at its 52-week low but at a 5-year low. The company has improved margins, increased its dividends and its cost cutting measures. It is worth more then $40 per share it worth about $57 per share based on increased earnings, cost cutting, better efficiency, and a large dividend increase.