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Icahn’s payout push could put driller in a hole

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Carl Icahn's payout plan could put U.S. oil and gas driller Transocean into a hole. The billionaire activist is pushing the company for a $1.4-billion (U.S.) dividend. That's nearly half the outfit's annual cash flow and could preclude upgrades to its aging rig fleet. The company's counter of an $800-million payout should appease investors while keeping operations humming.

The activist has recently been a force for good in the energy sector. After Mr. Icahn took a chunky stake in gas driller Chesapeake Energy, misbehaving boss Aubrey McClendon – who treated the company like a personal fiefdom – was booted out. Transocean, however, seems less in need of the Icahn treatment.

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True, the company has occasionally blundered – most notably by issuing new stock at the end of 2011, when shares traded at multiyear lows. It also entered decade-long deals to rent out its deep-water rigs for below-market prices. But the company seems poised to right itself under the new and highly respected chief financial officer, Esa Ikaheimonen, poached from Norwegian rival Seadrill.

Mr. Icahn's prescription, on the other hand, threatens to destroy long-term value. His proposed payout would amount to 45 per cent of 2013 operating cash flow, according to Argus Research, and about 85 per cent of forecast earnings. Even a minor mishap could force the company to cut the dividend – a bugbear for investors.

What's more, credit rating agencies have already put Transocean on the lowest investment-grade level, and paying an industry-high dividend wouldn't help matters. The company shouldn't risk a ratings downgrade that would boost the cost of servicing its $11-billion of long-term debt.

The proposed $800-million payout is plenty generous. At 25 per cent of the $3.2-billion operating cash flow forecast by Argus Research for 2013, it would be on the high side for the industry. Yet it leaves a reasonable margin for necessary capital investment.

That's an area in which Transocean needs to improve. The company shelled out only 17 per cent of revenue on new gear in 2012, far less than competitors. Though it plans to spend more this year, it can't afford to fall further behind. Under Mr. Icahn's plan, it would risk doing just that.

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