Source: Transocean. 

We can now add Transocean (NYSE:RIG) to the list of energy companies that have been forced to reduce their investor payouts due to the turmoil in the oil market. That's after the company's Board of Directors recommended that shareholders approve a $0.60 per share dividend in 2015, which is 80% less than the $3 per share the company paid investors in 2014. In so doing it joins fellow offshore drilling peers Seadrill (NYSE:SDRL) and Diamond Offshore Drilling (NYSE:DO) in the dividend cut camp.

Striving to stay afloat
In commenting on the new dividend rate for 2015 Transocean's Board said:

In the context of a cyclical and capital-intensive industry, the Board remains focused on driving long-term value through the execution of the company's disciplined and balanced capital allocation strategy. This strategy includes maintaining a strong, flexible balance sheet and an investment grade rating on the company's debt; value-creating reinvestment in the business; and a competitive and sustainable distribution of cash to shareholders. The Board believes that the level of the proposed dividend supports these objectives.

The key take away from that statement is the fact that the company's board has put maintaining its investment grade credit rating over its dividend. That's not a bad choice, especially in light of the fact that there's a big worry that the credit markets could tighten for energy companies if the oil downturn lasts for another year. So, in order to sidestep this issue, the company is taking action to protect its balance sheet.

Overall, the cut will save the company about $800 million in 2015 over the previous dividend level, which gives the company an added cushion of flexibility over the next year. That's a lot of cash, even for a company the size of Transocean. For perspective, it represents about half of the $1.5 billion-$2 billion the company planned to spend each year on its newbuild fleet. So, that cash will enable the company to fund its fleet renewal program without loading down its balance sheet with too much debt.

Following the crowd
Funding concerns aside, Transocean's dividend cut really came about because its industry peers are cutting their payouts. That makes it easier on Transocean as it can simply join the crowd instead of infuriating its shareholder by starting the trend, which is what Seadrill did.

Source: Seadrill.

What's different about Transocean's cut is that it didn't follow the exact same path as either Seadrill or Diamond Offshore. Seadrill, for example, opted to cut its dividend all the way to zero. The company is using most of the cash saved to pay down debt in a move to fix its balance sheet as it was starting to see access to credit tighten a bit. However, the company didn't completely stop returning cash to shareholders. Instead of a dividend the company has opted to return cash via a buyback as it plans to repurchase about 10% of its beaten down stock. 

Diamond Offshore, on the other hand, opted to cut its very generous special dividend while continuing to pay its regular dividend of $0.125 per share. That special dividend has been fairly regular as the company had been paying out the same $0.75 per share special dividend each quarter for more than four years. Overall, the company has paid out an astounding $41 per share in total dividends since 2006 totaling $5.7 billion in cash. However, given the current downturn, the company felt it was prudent to hold back that cash. It's looking to put it to use in buying distressed assets from rivals that need to sell in order to stay afloat during the downturn, which could provide an exceptional long-term return for investors.

Investor takeaway
Transocean is making a move investors have largely expected since Seadrill cut its dividend late last year. While it's not completely stripping its investors of income, it is reducing their quarterly income stream by 80%. However, the move really does make a lot of sense as it should ensure that Transocean doesn't have trouble staying afloat during this very turbulent time in the offshore drilling sector.