Transocean Makes Final Preparations to Copy Seadrill


Photo credit: Seadrill 

If you can't beat them, join them. That's exactly where we find Transocean (NYSE: RIG  ) this week as it takes a page out of Seadrill's (NYSE: SDRL  )   playbook. In this case Transocean is copying Seadrill's creation of Seadrill Partners (NYSE: SDLP  ) by launching an IPO for its own master limited partnership.

Imitation is the sincerest form of flattery
Transocean's MLP, to be called Transocean Partners, will initially own a 51% interest in companies that own and operate three ultra-deepwater drilling rigs in the Gulf of Mexico. Transocean is filing for a $350 million IPO of the unit, which is intended to provide the company with additional flexibility to grow its business.

This is a model that has worked well for Seadrill. When it created Seadrill Partners in 2012, the initial fleet consisted of two semisubmersible rigs, a drill ship, and a tender rig. Today Seadrill Partners' fleet consists of nine vessels following a series of drop-down transactions with Seadrill.

Why it matters
Seadrill uses affiliated companies such as Seadrill Partners to enhance its financial flexibility while building out its fleet. Over the past quarter alone the company engaged in five transactions to strengthen that flexibility. That included selling a 51% interest in its West Auriga drill ship to Seadrill Partners. Through some rather complex financing arrangements, the implied purchase price for the stake landed at $1.24 billion, though Seadrill Partners' net purchase price was only $355.4 million. This deal unlocked the full value of the asset on Seadrill's balance sheet while also providing the company with a few hundred million dollars in cash that it could use to fund its dividend and improve its balance sheet in order to pay for its newbuild program.

Photo credit: Seadrill.

Transocean is after this same financial flexibility. It, too, will be able to drop down assets to its MLP at attractive prices. This will unlock the full value of those assets, while providing Transocean with cash needed to fund its ever-growing dividend and pay for its own ambitious newbuild program.

Transocean will need this flexibility to support plans to spend $1.5 billion-$2 billion each year to renew its fleet That is a big undertaking for a company that is also paying out a larger portion of operating cash flow as a dividend to investors. While the company plans to divest a number of noncore assets to bridge the gap, its MLP will become an important source of capital for the assets it wants to keep.

Photo credit: Transocean. 

Investor takeaway
Transocean can see the value that Seadrill Partners has created for investors in Seadrill. It wants that same value to accrue to its investors, which is why it is copying Seadrill and creating its own MLP. This will enhance Transocean's financial flexibility by allowing it to monetize some of its rigs while still profiting from retaining an ownership interest in those assets. 

Do you know this energy tax "loophole"?
There's one more big reason why Transocean and Seadrill created MLPs. Both companies are after a special tax loophole that will really boost profit. You can actually take advantage of this same profitable opportunity in MLPs by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 24, 2014, at 10:36 PM, Invest58 wrote:

    Do current RIG owners get any shares of the IPO like they would with a spinoff?

  • Report this Comment On June 25, 2014, at 8:26 AM, TMFmd19 wrote:

    No, RIG is selling shares of the unit to the public to raise money. It's not likely any shares will be spun off to investors in the future.


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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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