Selling Transocean (RIG)

I am selling Transocean from my portfolio. The reasons for this decision are as follows

  • A management with bad capital allocation record. They paid their first ever dividend of 4 times $0.79 in fiscal year 2011 (dividend ~$1 bn). They then went on to acquire Aker Drilling at a premium of nearly 100% i.e., double Aker’s market value for $1.5 bn in Aug 2011. This took a toll on their balance sheet and they were threatened with a debt downgrade to junk. They then issued 29.9 mn shares for $1.2 bn to protect themselves in Nov 2011. This in my opinion is gross mismanagement and reflects poorly on the judgement of the CEO Steve Newman.
  • Transocean has an ageing fleet and will need to increase its capital expenditure to replace rigs and their equipments. This would not have been a huge problem for me if I had faith in the management.

I made a small profit on the sale. I bought the stock for Sfr 50 and sold it for Sfr 52.7. Not great considering that I held the stock since Jun 2011.

The lesson to be learned here is keeping track of the management. If you do not agree with their capital allocation strategies, exit as soon as possible. I will not repeat the mistake I made with Hewlett-Packard (HPQ).

Another note is to look at capital expenditure of the company. In this case, I could have found out that Transocean had an ageing fleet and will see an increase in Cap-Ex over the coming years – before starting a position. The information was publicly available. This shows lack of due diligence from my side. I hope to not make this mistake again.

The cash continues to build.

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