For Transocean, It’s Finally Time to Shine

by Aaron Levitt | January 4, 2013 9:12 am

For Transocean, It’s Finally Time to Shine

While BP (NYSE:BP[1]) gets most of the blame for 2010’s Deepwater Horizon disaster in the Gulf of Mexico, plenty of other players were involved. While oil service firm Halliburton (NYSE:HAL[2]) has yet to see its day in court, another of the key parties has finally made a deal with the U.S. Justice Department.

Transocean (NYSE:RIG[3]) — the drilling company that owned the oil rig that created the catastrophic spill and employed nine of the 11 workers killed there — has pleaded guilty to violating the Clean Water Act and on Thursday agreed to pay a $1.4 billion fine[4]. That includes a $1 billion civil fine and $400 million in criminal fines, but is less than the total of $2.5 billion forecast by analysts.

Like the rest of its well disaster brethren, the pending litigation stemming from the spill has severely hindered Transocean’s share price and potential prospects. Since the Deepwater Horizon rig exploded in 2010, RIG has plummeted roughly 50% and now trades around $49 — after jumping more than 6% on Thursday’s settlement news. And with that legal threat lifted, Transocean can now live up to its long-term promise.

For investors, that’s a pretty good deal.

Civil and Criminal Charges

Of the $400 million in criminal fines, roughly $150 million will be used to help protect the Gulf of Mexico, while another $150 million will fund spill-prevention and response efforts there. At least 80% of the $1 billion civil fine will fund environmental and economic projects in the five Gulf states affected by the spill. Justice is also forcing Transocean to implement measures to improve safety[5] and emergency responses on its U.S.-based rigs.

The rig operator is following in BP’s footsteps, which agreed in November to its own settlement with Justice worth almost $4.5 billion[6]. That included the largest criminal fine ever at $1.256 billion. BP also agreed to plead guilty to felony charges of obstruction of Congress. Oil service firm Halliburton, which performed cementing work on the well, remains the last participant that hasn’t yet settled with Justice.

According to U.S. Attorney General Eric Holder, the Transocean agreement “brings us one significant step closer to justice for the human, environmental and economic devastation wrought by the Deepwater Horizon disaster.”

And it brings potential investors one step closer to capitalizing on Transocean’s alluring potential.

Refocusing on Drilling

While Transocean isn’t completely clear yet — a possible $4 billion settlement with the plaintiffs’ committee representing individuals claiming damages remains — its deal with Justice does put a huge burden and much uncertainty to rest.

First, offshore drilling is hot, especially so for deepwater offshore drilling[7]. While onshore rig counts in North America continue to drop due to the glut of natural gas, offshore rig numbers are rising. With the Gulf drilling moratorium now ended[8] many exploration and production (E&P) firms have been chomping to gain access to the region’s ultra-deepwater fields.

That demand for state-of-the-art drilling rigs has pushed day rates up past record highs. Fellow driller Noble (NYSE:NE[9]) is currently getting roughly $600,000 a day[10] to rent its best rigs, and Ensco (NYSE:ESV[11]) has been able to roughly double its day-rate charges.

Since the spill, Transocean has gone gangbusters in shedding low-margin shallow-water rigs[12] and is now a deepwater machine with its fleet capable operating in 10,000 feet of water and drilling several miles underground. That deepwater focus generates an average day rate of roughly $400,000 per vessel. Already, the majority of Transocean’s revenue is generated by this ultra-deepwater fleet.

With the specter of the spill now mostly behind it, Transocean can focus on getting those rigs rented out and drilling. It has announced that it expects that the fleet to be busier in 2013, and that the current high-revenue-generating levels will be sustained throughout the year. Transocean forecasts[13] the number of out-of-service days for its fleet in 2013 to be 1,744, down from 2012’s estimated 2,524 days.

That means continued improving earnings, RIG shares climbing and perhaps a return to paying a dividend by year-end.

All in all, the settlement is great news for shareholders. I’d be looking to add shares of driller if the market takes a downward turn.

As of this writing, Aaron Levitt didn’t own any securities mentioned here.

Endnotes:
  1. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  2. HAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAL
  3. RIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIG
  4. agreed to pay a $1.4 billion fine: http://uk.reuters.com/article/2013/01/03/uk-usa-transocean-settlement-idUKBRE9020H920130103
  5. improve safety: http://www.investorplace.com/2012/06/safer-oil-rigs-a-win-win/
  6. almost $4.5 billion: http://investorplace.com/2012/11/the-hammer-comes-down-on-bp/
  7. offshore drilling: http://investorplace.com/2012/11/energy-producers-swarm-the-gulfs-deepwater/
  8. Gulf drilling moratorium now ended: http://investorplace.com/2012/05/energy-independence-the-gulfs-growing-role/
  9. NE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NE
  10. getting roughly $600,000 a day: http://investorplace.com/2012/07/surging-drill-rig-rates-will-fuel-noble/
  11. ESV: http://studio-5.financialcontent.com/investplace/quote?Symbol=ESV
  12. shedding low-margin shallow-water rigs: http://www.investorplace.com/2012/09/transoceans-promising-deep-water-future/
  13. Transocean forecasts: http://www.reuters.com/article/2012/11/05/us-transocean-outlook-idUSBRE8A412420121105

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