Billionaire Carl Icahn Builds His Stake in This Drilling Company

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The activist investor Carl Icahn got active again! Recently, Transocean (NYSE: RIG) reported that Carl Icahn acquired 3.26% of the company, including 1.56% common shares and a synthetic long position representing 1.7% of the total shares outstanding. In addition, he is seeking approval to acquire voting securities of the company. Should investors follow Carl Icahn into Transocean, even after the $1.4 billion fine for the Gulf of Mexico spill? 

Business Snapshot

Transocean, incorporated in Sweden, is one of the global leaders in offshore contract drilling services for both oil and gas wells, with around 50 High Specification Floaters, 25 Midwater Floaters, 9 High Specification Jackups, 49 standard Jackups and one swamp barge. The business is divided into two main segments: contract drilling services and drilling management services. The majority of the company’s operating revenue was generated in the US, with nearly $2 billion in 2011. The other two countries, which have contributed significant revenue to the company were the UK with $1.2 billion, and Brazil with more than $1 billion in 2011. The biggest customer has been BP, which accounted for around 10% of the company's total revenue.

Fluctuating Performance

In the past 10 years, Transocean has managed to generate positive operating cash flow and free cash flow. The operating cash flow has grown from $937 million in 2002 to nearly $5.6 billion in 2009, then it dropped to nearly $1.79 billion in 2012. The free cash flow has also been fluctuating in the last 10 years, ranging from $30 million to $2.75 billion. Trailing twelve months, the operating cash flow and the free cash flow were $2.35 billion and $1.28 billion, respectively. The $5.5 billion operating loss in 2011 was due to the goodwill impairment of around $5.2 billion.

High Leverage

In the beginning of this year, Transocean agreed to pay a $1.4 billion fine to the US government regarding to Gulf of Mexico spill, including a $400 million criminal fine and $1 billion in civil penalties, plus interest. As of September 2012, Transocean reported to have $15.27 billion in total shareholders’ equity, $6 billion in cash, $2.73 billion in short-term debt and nearly $11.39 billion in long-term debt. However, the maturity date has been spread out in years and the average interest rate was not so high, in the range of 1.56% to 6.78%. Transocean reported to have the adjusted long-term debt level between $7 billion to $9 billion, with the liquidity level of $5 billion to $6 billion.

Lowest Margin Among its Peers

Transocean is currently trading at $54.69 per share, with the total market capitalization of $19.66 billion. The market is valuing the company at 11.35x forward earnings and 9.3x EV/EBITDA. Compared to its two peers, including Ensco (NYSE: ESV) and Noble Corp (NYSE: NE), Transocean has a bit cheaper valuation. Noble is the most expensive one with 10.78x EV/EBITDA and Ensco’s EV multiples is 9.61x. However, Transocean generated the lowest operating margin among the three. Its operating margin was 15% in the past 12 months. Ensco had the highest operating margin of 35%, whereas Noble’s operating margin stayed at 22%. Transocean and Noble are paying the same dividend yield of 1.4%, and Ensco is paying the highest yield among the three, of 2.5%.

Foolish Bottom Line

Carl Icahn’s stake and his synthetic long position have shown his bullish attitude towards Transocean. In the near future, Icahn might reveal his thesis on this investment. However, I would consider it as an opportunistic play rather than a long-term investment due to the fluctuating performance and its high debt level. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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