NEW YORK (TheStreet) - Some offshore drillers will have to cut dividends to adjust to shrinking cashflow amid an oversupply of drilling rigs and deteriorating crude prices, but Transocean (RIG) shareholders may avoid this fate thanks to the company's strong balance sheet and Swiss corporate governance rules.
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However, the dividends of Transocean (RIG) , the world's biggest offshore drilling contractor in terms of number of rigs, are safe, even as the current dividend program comes to an end in March 2015, Longdley Zephirin, principal and analyst at the Zephirin Group told TheStreet in an interview. Transocean has paid a dividend of 75 cents a share for the last three quarters and has said its dividend will total $3 over the course of the year.
With 91 rigs, Transocean has the largest fleet in the world, including a dozen rigs that are currently under construction. By comparison, competitors Ensco (ESV) has 72, Seadrill (SDRL) has 68, and Diamond Offshore (DO) owns 39 rigs.
However, Transocean's fleet includes more than 30 rigs that originally came into service at least three decades ago. The fleet of some of its competitors, on the other hand, such as Seadrill, Rowan Cos. (RDC) and Atwood Oceanics (ATW) , consists largely of modern high-specification rigs that generate better day rates than older ones.
But having an older fleet "is not necessarily a bad thing" Zephirin said in an email, particularly "when the rigs are fully paid-off, and are able to contribute positive cash flow that is well above the cost of capital." A majority of Transocean's fleet, including 78% of its high-specification jack-up rigs, are under contract through 2015. This will allow the company to continue generating cash in a tough market.
To address concerns related to older rigs, Transocean has been transforming its fleet. Transocean CEO Steve Newman, in comments during the third quarter conference call, said that the company will continue to add new rigs while retiring its older units over the next few years.