Transocean said on Monday morning it would support the re-election of Samuel Merksamer and election of Vincent Intrieri to its board of directors at the company's 2014 annual general meeting. Both directors are employees of Icahn Enterprises. Transocean also will reduce its board from 14 members to 11 total members.
Icahn Enterprises, which holds a near 6% stake in Transocean worth $1.15 billion as of Friday's close, has agreed to vote in favor of the company's slate of director nominees and proposals it plans to recommend at the 2014 AGM.
Transocean said it would look to implement a master limited partnership to improve its capital structure. The company will look to sell stock in an MLP structure in the middle of 2014, and will retain a minority investment in the entity.
A Transocean MLP would likely securitize cash flows of some of Transocean's drilling rigs into a publicly traded stock that gives investors a significant yield. That MLP security could increase the valuation of some of Transocean's rigs and allow the company to use proceeds from a prospective IPO to reduce its debt, increase dividends or reinvest in higher-margin rigs.
The seeds of Transocean's MLP were arguably set when Esa Ikaeheimonen joined the company as CFO in late 2012, Credit Suisse analyst Gregory Lewis said in a Monday research note. Ikaeheimonen was previously CFO of Seadrill (SDRL).
As part of Transocean's realignment of its board and capital structure, the company also said on Monday it plans to improve its operating margins by $500 million through operational improvements and cost reductions through 2014. Those improvements, taken in conjunction with the previously disclosed $300 million in cost savings associated with its onshore drilling operations, will put total targeted operating margin improvement at approximately $800 million by the end of 2015.
Transocean said on Monday it would increase its annualized dividend to $3 a share from $2.24 a share, starting in six months' time.
"I am pleased that the Board has agreed to add Vince Intrieri as a nominee, and to reduce the Board size to eleven and I am especially happy about the commitment to pursue a MLP, raise the dividend and increase margins by $800 million through cost cutting and increased efficiency," Carl Icahn said in a Monday statement.
"I believe that Transocean is now on the road to realize its great potential. We look forward to continued collaboration with the Board of Directors and management," Icahn added.
Transocean shares were gaining over 3% in early Monday trading. Shares have gained over 23% year-to-date, slightly underperforming the S&P 500 Index.
"We think investors will be positively surprised by RIG's aggressiveness pursuing these value enhancing proposals, as well as the collaboration with Icahn that could imply greater financial discipline going forward," Matthew D. Conlan, a Wells Fargo energy analyst, said in a Monday client note.
The analyst rates Transocean shares "outperform" and said in a client note the company's discounted valuation relative to its net asset value (NAV) likely enticed Icahn's stake roughly a year-ago.
Conlan said that while most investors may focus on Transocean's MLP structure and a prospective mid-2014 IPO, cost cutting initiatives such as the company's aggregate $800 million expense reduction could drive flexibility for further dividend increases.
Credit Suisse called Transocean's new operational guideposts "beyond financial engineering." According to their analysis, the company has the lowest operating margins in the industry. They expect Transocean to reinvest some cost savings in a fleet modernization that could drive in-line margins with its peers.
"We are pleased that Mr. Icahn recognizes the changes currently underway at Transocean and the continued focus of the Board and management on creating shareholder value, Steven L. Newman, Transocean's CEO, said in a statement.
For Carl Icahn, the Transocean standstill represents a major activist success after he failed in a competing takeover proposal for PC-maker Dell. It also adds to a string of successes he and other activists have had in the oil industry.
Icahn won board seats on Chesapeake Energy (CHK) in 2012 and helped to spur a change in the company's board and management ranks after founder Aubrey McClendon came under intense scrutiny for the firm's financial practices. With Icahn on board, Chesapeake Energy has executed non-core shale asset sales that have helped the nation's second largest gas driller plug an over $10 billion hole in its balance sheet.
Icahn also recently pushed for Canadian oil and gas driller Talisman Energy (TLM) to consider asset sales.
Other activists such as Elliott Management and TPG-Axon have also led large changes at drillers such as Hess (HES) and Sandridge Energy (SD), making the oil and gas industry one of the hottest sectors for activist investors in recent years.
Icahn remains a busy investor in 2013. The activist has begun to advocate for a $150 billion share buyback at Apple (AAPL) and he played a prominent role in Dell's (DELL) $25.9 billion takeover by founder Michael Dell and private equity firm Silver Lake Partners.
"[In] my opinion there has never been a better time than today for activist investing, if practiced properly." Icahn said in a third quarter earnings release for his holding company, Icahn Enterprises.
To make the point, Icahn cited low interest rates and a growing realization among institutional investors that they have the ability to replace mediocre management teams and weak corporate boards.
"I believe that the greatly increasing need for a catalyst to make acquisitions possible and to make mediocre managements accountable will be of meaningful benefit to Icahn Enterprises in future years," Icahn added.
Since 2000, Icahn Enterprises has posted an annual return on its investments of 22%, the company said in its earnings release.
Jim Cramer, founder of TheStreet, said on CNBC that Icahn's successful Transocean campaign reinforces the notion that "there is value everywhere in the market."
-- Written by Antoine Gara in New York