(RIG) Transocean Tanks on Offering Notice

Offshore drilling giant Transocean Ltd. (RIG) priced a public offering of 26 million shares at $40.50 a piece, with a 30-day over-allotment option for an additional 3.9 million shares.

The Zug, Switzerland-based owner of the world’s largest offshore rig fleet plans to use the net proceeds from this offering – expected to be approximately $1.0 billion after the underwriting discount, estimated offering expenses and the Swiss Federal Issuance Stamp Tax – to buy back about $1.7 billion of its 1.5% series B convertible senior notes due December 2037.

The share sale would also allow Transocean to partly refinance its purchase of Norway’s Aker Drilling ASA, which was completed in early October. The $1.5 billion transaction was originally financed through cash on hand and the assumption of Aker’s outstanding debt.

However, the issuance of new stock – that represents roughly 8% of the company’s total outstanding shares – has led to investor skepticism regarding the continuity of the current dividend payout by the Swiss offshore driller. As of now, Transocean pays an annual dividend of $3.16 per share, yielding an attractive 7.6%. Though the company will most likely pay its remaining installments of the currently planned dividend of $1 billion, it is quite likely that Transocean will cut the payout thereafter.

Additionally, there are apprehensions that the share sale would seriously dilute Transocean’s earnings. As a result, following the stock sale announcement, shares of Transocean dropped $4.31, or more than 9%, to close at $41.63. Earlier in the day, the shares hit a 7-year low of $41.28.

Transocean, whose ultra-deepwater Horizon drilling platform – contracted to British major BP Plc (BP) – sank following a fire and explosion while operating in the U.S. Gulf of Mexico last year, is already struggling with the decline in utilization rates and high operating costs.

In particular, the deepwater Horizon incident continues to create some overhang on the stock because of Transocean’s direct involvement and the ensuing uncertainty regarding the company’s potential liability exposure. The high out-of-service time, together with the rise in net debt/reduction of liquidity associated with the recently completed Aker acquisition, are also near-term setbacks, in our view.

Given these concerns, we expect Transocean to perform below its peers and industry levels in the coming months. As such, we see little reason for investors to own the stock. Our long-term Underperform recommendation is supported by a Zacks #5 Rank (short-term Strong Sell rating).

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