Is Transocean's Big Cut Really A Surprise?

The plunge in crude price – from over $100 per barrel in June last year to the recent $50 per barrel mark – has led several firms in the oil industry to take drastic measures to remain afloat. Treading on the same lines, offshore drilling giant Transocean LTD RIG, announced a cut in its 2015 dividend payout.

The Switzerland-based firm plans to lower its dividend to 60 cents, an 80% nosedive from the earlier payout of $3 per annum. The company added it strives to maintain long-term value and capital discipline with this move.

Transocean further announced the resignation of its CEO, Steven Newman – a move being connected with the dividend cut. The company also said that the Chairman of the Board, Ian Strachan will serve as the interim CEO till a replacement is found.  

A Surprise? Not Really

The dividend cut, however, is not really a surprise. Offshore drilling firms have been under a lot of pressure lately as low crude pricing means less contracts from exploration and production firms. Several energy biggies like Chevron Corporation CVX, Suncor Energy Inc. SU, Marathon Oil Corp. MRO have cut 2015 capital spending, translating into lesser activity for drillers. Furthermore, the offshore market remains oversupplied.

The weakness is evident from Transocean's stock price as well, which has witnessed a fall of over 54% since June last year. Moreover, with near-term outlook for oil remaining bearish, measures like dividend cuts, as a means to preserve cash, were evident.

While oilfields located in ultra-deep waters hold substantial potential, explorations at these avenues require huge capital outlay. Thus, maintaining profitability has become a challenge for many of these players. As such several firms from the energy sector have taken similar measures, including dividend cuts or suspension, layoffs or restructuring of operations to better handle the situation.  

Mixed Feelings

Obviously, an 80% cut in dividend does not fare well with investors. However, hanging by the tread of optimism, it is a dividend cut, not a suspension like the one announced by SeaDrill Ltd. SDRL last November.

The new dividend of 60 cents results in a yield of about 3.15% (as of the closing price on Feb 13), not too bad considering the present scenario. Moreover, the company's announcement that it would still be able to pay dividend instills confidence.

However, with high leverage and a weak pricing environment, we remain wary of the Transocean stock. We do not see any improvement in the near-term as the recovery of oil prices is expected only toward the latter half of the year. As such, Transocean currently carries a Zacks Rank #3 (Hold).

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