Within the offshore drilling sector, one company stands out when it comes to the question of shareholder returns: Transocean (NYSE:RIG).
Unlike Seadrill, which offers a larger dividend payout, Transocean is committed to sustainable shareholder returns. Management is doing everything it can to prove that the company's dividend payout is sustainable. Meanwhile, Seadrill's payout is always coming under scrutiny.
Transocean is currently in the process of undertaking a three-legged "assault" to boost shareholder returns. These target three main goals: financial flexibility, capital investment (including the modernization of its fleet), and returning capital to investors.
Transocean's first goal is to achieve financial flexibility. Within this goal, the company has four major targets. The most important of these targets is margin growth through cost cutting to free up an additional $800 million per annum. The second target, which ties in the with first, is to spin off or create a master limited partnership subsidiary that contains some of Transocean's best drilling units. The other two financial targets are to reduce debt and divest non-core assets.
So far, Transocean is making great progress in achieving these goals.
Based on its first-quarter results, Transocean managed to push down operational expenses by 13% quarter on quarter. Just before the company announced its first-quarter results, management also revealed that the company is spinning off eight of its UK North Sea midwater drilling rigs. The company expects to establish the new entity, Caledonia Offshore Drilling Company, during the second half of 2014.
This move to spin off North Sea assets is a great industry-leading push by Transocean. You see, the North Sea has been somewhat of a bright spot for the offshore drilling industry during the past few years. In particular, data from the last two years shows that rig rental spending has grown at 15% per annum.
This spending has been driven by development programs involving some of the largest oil companies in the world. However, according to analysts at Credit Suisse, it would seem as if spending within the North Sea looks to be flat this year with two of the region's largest operators, Shell and BP, spending less than they did last year.
Transocean gets 26% of its revenue from the North Sea; with the Caledonia spinoff the company's exposure to the region will be significantly reduced. However, Rowan Companies (NYSE:RDC), will still be overweight the North Sea, as 32% of the company's revenue comes from the region, and this could hit the company hard if spending starts to fall/stagnate.
Other divestments are expected to take place through 2018.
Transocean's second prong of attack designed to improve shareholder returns is a strategy of capital investment. At present, the company is in the process of building 14 high-spec rigs, seven of which are already contracted out.
The new-build program is split between nine ultra-deepwater drillships and five high-spec jackup units. The new units are expected to be delivered from now through the second quarter of 2017.
Improving shareholder returns
The company's final prong of attack regards shareholder returns. In particular, the company is targeting an attractive dividend payout, which is expected to be around $3 per share per annum beginning this year. This payout is equivalent to a yield of 7.1% and will be funded from the growth initiatives listed above.
The new payout will give Transocean one of the highest dividend yields in the offshore drilling sector, significantly above the average of 3.9%.
Transocean is committed to both growth and shareholders returns. The company knows exactly how it's going to achieve these targets. So far, progress is good; Transocean is cutting costs, has made plans to spin off old units, has raised its dividend, and new drilling units are coming online. Shareholders should reap the benefits going forward.
Rupert Hargreaves owns shares of Rowan Companies. 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.