| March 1
March 1 Transocean Ltd has lured away
Seadrill Ltd's chief financial officer and investors
are eager to find out whether the world's largest offshore rig
contractor will borrow some of its rival's tricks to boost
Esa Ikaheimonen will speak on Monday on his first quarterly
conference call since assuming his new job in November fresh
from a successful spin-out out of an initial group of four rigs
from Seadrill into a partnership.
His appointment last year prompted chatter among analysts
that Transocean might seek to emulate Seadrill in setting up a
partnership vehicle for some of its own rigs, particularly after
the success of Seadrill Partners LLC, which is up 25
percent since the units debuted in October.
Transocean, having put much of its Gulf of Mexico spill
liability behind it, still faces weak valuation relative to the
sector. Experts say a partnership set-up for some of its more
lucrative assets could unlock some value by putting a dollar
amount on a specific part of the rig fleet.
Further fueling such speculation was the stake in Transocean
unveiled in January by Carl Icahn, an activist investor whose
fondness for master limited partnerships (MLPs) was demonstrated
by the January initial public offering of CVR Refining LP
MLPs pay virtually no corporate taxes since they deliver
nearly all profits to the owners of the MLP units, which trade
like stocks. They tend to be set up for long-lived assets with
steady cash flows, such as pipelines and oil wells, but their
use is spreading.
Even before Icahn's stake, analysts peppered outgoing
Transocean CFO Greg Cauthen with MLP questions back in November.
Cauthen responded that, while Transocean had not structured new
contracts to allow for rigs to move into an MLP, he did not see
the customer as a "big issue" if Transocean made that decision.
"We've actually looked at this, talked to the various banks,
watched as Seadrill did their transaction," he said. "And we're
going to continue to look at it and continue to monitor how an
MLP in the contract-drilling space actually performs over time."
THE ICAHN EFFECT
Once Icahn entered the picture, UBS analyst Angie Sedita
believed he would push Switzerland-based Transocean to place at
least a few of its 82 rigs into an MLP.
Ted Gardner, an MLP expert at Salient Partners in Houston,
also expected that Icahn would use the leverage of his 5.6
percent Transocean stake to make more noise about such a
partnership alongside his demands for a dividend.
Transocean would simply have to make sure the contracts for
the rigs going into such a vehicle did not all expire at once.
"The name of the MLP game is stable cash flows," Gardner
said. "The great thing about MLPs, especially if you have a big
asset base, is you can structure something that works."
Demand for deepwater drilling rigs is strong and contract
durations are lengthening, so Gardner said it was hard for rig
owners to avoid thinking about MLPs because of the potential
improvement in their valuations.
The improving demand helped Transocean report a
higher-than-expected quarterly profit late on Friday.
Seadrill is a Norway-listed company with a smaller but
younger fleet of rigs than Transocean and it also has a majority
owner, shipping entrepreneur John Fredriksen, with a greater
penchant for financial engineering than Transocean.
The gap between them became especially clear when Seadrill
overtook Transocean in market capitalization in late 2011, a
situation that has since been reversed.
Yet Transocean is still a laggard in the industry when it
comes to valuation, even after its $1.4 billion settlement in
January with the U.S. government over the 2010 BP Plc
Transocean still needs to settle with 100,000 individuals
and businesses claiming spill-related damages, which is the
subject of a trial that started this week in New Orleans.
Looking at a measure that captures both debt and equity -
enterprise value as a multiple of earnings before interest, tax,
depreciation and amortization (EV/EBITDA) - Transocean's ratio
is less than 8, while Seadrill is at nearly 12 and Ensco Plc
is 9, based on data from Thomson Reuters-owned StarMine.
Fredriksen would be well acquainted with MLPs from his
interests in shipping, where Gardner said ships in MLPs tended
to have charters of about three years.
But Transocean is a conservative company by nature, with
military roots among its past leadership. Chief Executive Steven
Newman is a Harvard Business School graduate like predecessor
Bob Long, although Long was also a Naval Academy graduate who
served under a chairman who had been in the Air Force.
Newman voiced caution last month about the excitement around
potential MLPs in offshore drilling, since they were long-lived
assets that did not necessarily have stable cash flows.
"Some of the concerns I think a lot of us have tend to
revolve around the cyclicality of this industry," he said at an
industry conference. "If I'm going to put a Transocean name on
something, I want to make sure I can stand behind that and
continue to confidently sell that in the marketplace."
Asked if anyone in the offshore contracting business would
launch an MLP this year, Newman added: "There's enough people
looking at it and enough shareholder interest in it that I
wouldn't completely rule it out, no."