In a regulatory filing yesterday, Transocean Ltd. (RIG) confirmed its intention to spin-off parts of the company. The Zug, Switzerland-based company is doing this as part of cost-controlling measures first agreed upon with the Icahn Group late last year.
Transocean is the world’s largest offshore drilling contractor, with a presence in major drilling sites across the globe. The company was also identified as one of the operators behind Deepwater Horizon, which blew up in 2010 in the Gulf of Mexico.
Transocean’s Spin-Off Plan
According to the latest reports, the company intends to spin off eight out of 21 midwater floaters from its current fleet of 78 rigs. The majority of the company’s current fleet comprises either deepwater or ultra-deepwater rigs, with Transocean owning 12 of the former and 27 of the latter.
According to the company, the spin-off will form a separate entity named Caledonia, with operational focus in the UK’s North Sea. It is part of a greater strategy in which the company agreed to divest noncore assets, which increasingly constitute any rigs not operating in either deepwater or ultra-deepwater environments. Most of the available crude is now being drilled lower and lower under the sea bed, so the divestiture of midwater rigs makes sense for the company.
Caledonia is expected to be formed in the latter half of the year, and will eventually be split from the Transocean umbrella sometime after that. The eight rigs to be divested are from the 1970’s and 1980’s, capable of operating at depths of around 1,800 feet, with drilling capabilities of around 25,000 feet. Eventually, Transocean expects to form the new entity under a Master Limited Partnership (MLP), with an initial public offering some time down the road.
The Icahn Factor
The spin-off comes about as part of a larger understanding between Transocean and one of its largest backers, activist investor, Carl Icahn, who heads the Icahn Group. The two agreed to terms late last year after months of proxy war. Transocean agreed to a dividend payment of $3 out of the additional paid-in capital. The two also agreed to reinstate Samuel Merksamer to the board, while adding Vincent Intrieri and reducing the overall count of the Board of Directors from 14 to 11. In return, the Icahn Group agreed to vote in favor of the company’s board nominees, as well as additional proposals that will be presented at the annual meeting this year.
Transocean Earnings Preview
Transocean is scheduled to release its latest quarterly earnings results tomorrow after markets close. Consensus analysts’ estimates are calling for earnings per share of around $1.02, a 3.5% decline over the last four weeks. Diamond Offshore Drilling Inc. (DO), a close competitor of Transocean, released its earnings results on April 24. The company beat earnings estimates as the company scaled back and was able to cut expenses.
In order for Transocean to continue to compete effectively in an industry in which new competitors are operating relatively newer fleets of rigs, the company will have to focus on curbing expenses. The latest move seems to be a step in that direction.