Should You Follow Carl Icahn Into Transocean?

Investor activism seems to be all the rage these days. In an era of enhanced market volatility and an uncertain global economic outlook, investors—particularly at the institutional level—are pressuring companies to provide greater cash returns to shareholders. Having the influence and resources of a major hedge fund manager can often result in individual investors winning big, and that's exactly what's happening with offshore driller Transocean (NYSE: RIG  ) .

With noted money manager Carl Icahn recently securing a greater payout to shareholders, should individual investors follow his lead and buy the stock?

Icahn to the rescue
Carl Icahn first got involved with Transocean earlier this year, urging Transocean to return more cash to shareholders than the company initially intended. Transocean held onto its cash flow for some time, not entirely unreasonable given the fact that it was the owner of the rig that exploded in the Gulf of Mexico in 2010. However, Icahn's position was that Transocean had more than enough financial flexibility to withstand the likely damages, and that paying a hefty dividend was both feasible and in shareholders' best interests.

Judging by Transocean's results this year, it's hard to disagree with that assessment. Transocean grew revenue by 4% over the first nine months of the year, and operating income has soared 75% in the same period. This is due in large part to the boom in offshore drilling, where an increasing percentage of global oil discoveries are located.

Other offshore drillers are seeing comparable results thanks to the strong industry fundamentals. Noble Corp. (NYSE: NE  ) grew revenue and earnings per share by 19% and 53%, respectively, through the first nine months of the year. Industry peer Ensco plc (NYSE: ESV  ) is also performing strongly, as its own revenue climbed 14%, and EPS grew 10.5% in the past nine months, year over year. Ensco management was so pleased by its results that the company doubled its dividend and now yields a hefty 4.8% yield at recent prices.

Strong performance set to continue
Going forward, strong results are expected to continue for Transocean. Oil is getting harder to come by, with many discoveries occurring in harsh environments. That's resulted in a pronounced need for Transocean's specialty rigs which cater to difficult environments, and Transocean now has a nearly $30 billion contract backlog in its pocket.

The positive fundamentals of offshore drilling were echoed by management of both Noble and Ensco after their earnings reports. Noble Chairman, President, and CEO David W. Williams is entirely bullish on his company's outlook. After releasing third-quarter results he stated, "A heightened focus by customers on exploration opportunities with an increasing interest in frontier locations, and the onset of a growth phase in field development programs are driving customer demand for the foreseeable future."

Ensco, meanwhile, points investors to its new ultra-deepwater drillship and an ultra-premium harsh environment jackup, which will drive earnings growth in the years ahead. Ensco accepted delivery of the two rigs in question, the ENSCO DS-7 and ENSCO 120, during the third quarter, and both involve multi-year contracts.

In conclusion: Transocean is a buy
Transocean's business is full speed ahead, showing few negative effects from the 2010 Gulf of Mexico spill. The company is realizing great rewards from the demand for specialized offshore rigs in the new global reality of hard-to-reach energy sources.

This has caught the attention of Carl Icahn, whose efforts to get Transocean to pay a higher dividend to shareholders has worked. Transocean initially settled on a $2.24 per share dividend, but clearly that didn't make Icahn happy. He kept pressing, and sure enough, Transocean recently increased its dividend to $3 per share. That provides a solid 5.5% yield and is still very secure due to Transocean's impressive fundamentals.

I've written very favorably about Transocean (and the offshore drilling industry as a whole) throughout the year, and continue to believe Transocean has a great future ahead of it. It's worth noting that the stock has surged in the past few weeks, which may understandably make potential investors uneasy. While it's always reasonable to wait for a dip before buying in, I agree with Carl Icahn: Transocean is an ideal long-term buy and hold stock.

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