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Billionaire investor Carl Icahn has decided to take advantage of the fact that offshore drilling companies seem to be highly undervalued despite the strong demand for deepwater drill rigs. He currently owns a 3.26% stake of Transocean Ltd (NYSE: RIG), made up of equity and options, and is now looking to spend an extra $682.1 million to increase his ownership to 5%.
The equity research team at Citi believes that Icahn will push for a return of dividend payouts at Transocean, one of the only offshore drilling companies not to pay dividends to shareholders; the likes of Noble and Rowan pay around 1.4% in dividends, Diamond Offshore pays 4.9%, and Seadrill pays 9%.
Icahn may face difficulties trying to get the board to agree on resuming dividends this year, as Transocean are still recovering from the Macondo oil spill, having recently paid out $1.4 billion in order to settle civil and criminal charges with the US Justice Department. The company will try to keep its cash levels high for the year so that it may deal with any other liabilities that may arise from the Macondo accident.
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Citi stated that, “Icahn’s actions broadly affirm, in our view, the fact that offshore drilling company share prices are deeply undervalued, even taking into account the cyclicality of their earnings and the operational challenges that the offshore drillers have faced in the wake of the Macondo well blowout and oil spill.”
As traditional oil fields start to decline, producing less and less yield each year, oil companies are forced to look for crude oil in less conventional places, such as deepwater locations. This has strengthened demand for offshore drill rigs and created interesting opportunities for investors; an opportunity made even more attractive by the undervalued stock across the sector.
By. Charles Kennedy of Oilprice.com
Charles is a writer for Oilprice.com