Transocean, Inc. (RIG)
It is pretty clear by now that British Petroleum (BP: Charts, News, Offers) is going to incur huge losses as a result of the Deepwater Horizon oil rig explosion and subsequent oil spill. Recent rumors using words like “default” and “bankruptcy” paired with a Goldman-Sachs (GS: Charts, News, Offers) downgrade have BP’s prospects sinking like a rock. However the future for Transocean (RIG: Charts, News, Offers), BP’s drilling partner in the Gulf, is not so clear. In fact, there is actually some evidence that Transocean could emerge from this oil spill debacle without being all that much worse for wear.
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Stock Analysis
Transocean is one of the largest offshore drilling contractors in the world. The company’s specialty is drilling in water and with the expansion of deepwater oil drilling; the company’s services have been in great demand. Drilling is considered “deepwater” whenever the depth exceeds 500 feet. The Deepwater Horizon rig happened to be drilling in over 5,000 feet of water, but Transocean has developed equipment that can work in oceanic depths of up to 12,000 feet while drilling wells of up to 35,000 feet. Transocean also has an existing contract with ExxonMobil (XOM: Charts, News, Offers) to provide a rig suitable for offshore drilling in frozen areas of the world such as the arctic. Transocean owns over 200 different offshore drilling rigs that are rented by oil and gas companies at a daily rate. Transocean competitors include Noble (NE: Charts, News, Offers) and Diamond Offshore Drilling (DO: Charts, News, Offers).
On the day of the explosion that killed 11 workers and unleashed an oil spill, there were workers from both BP and Transocean operating the rig being rented from Transocean by British Petroleum. The project was running close to five weeks late and costing an estimated $75,000 so the BP was definitely under pressure. There have been unconfirmed reports of an argument between members of the two companies about whether to combat the pressure of the well with seawater or the heavier drilling mud. According to the report, the BP workers won the argument and proceeded to use the lighter seawater for the operation. This decision is the likely catalyst for the explosion.
BP is receiving the lion’s share of the blame and liability related to this incident. In many respects,
Transocean is in the same fix as BP and the company’s stock shows the results as it trades at near five year lows. However, Transocean is not in as bad a position as BP for several reasons. First, Transocean’s contract with BP protects the company from most of the clean-up costs associated with the accident. A few lawsuits have been filed against Transocean and the results of these court cases could still hurt Transocean, however the greater liability rests on BP. Also, a showing of some kind of gross negligence on the part of Transocean could override the indemnification language in the contract. Transocean has nearly $1 billion worth of insurance and should the company be found liable, that liability could be shared between several companies including BP, Andarko (APC: Charts, News, Offers) and Halliburton (HAL: Charts, News, Offers).
Transocean is in the same fix as BP and the company’s stock shows the results as it trades at near five year lows. However, Transocean is not in as bad a position as BP for several reasons. First, Transocean’s contract with BP protects the company from most of the clean-up costs associated with the accident. A few lawsuits have been filed against Transocean and the results of these court cases could still hurt Transocean, however the greater liability rests on BP. Also, a showing of some kind of gross negligence on the part of Transocean could override the indemnification language in the contract. Transocean has nearly $1 billion worth of insurance and should the company be found liable, that liability could be shared between several companies including BP, Andarko (APC: Charts, News, Offers) and Halliburton (HAL: Charts, News, Offers).
Another reason that Transocean could recover from this tragedy is that the majority of the company’s projects are still operating. Transocean operates rigs all around the world and works with almost every major oil company. They are diversified within their area of expertise. The company still has cash flow and even if the results of the various liability proceedings and investigations cast the worst possible light on Transocean activities, the legal obligations are likely to be delayed for years and possibly decades. Some analysts believe that Transocean earnings will drop, but will only drop to levels that were experienced in 2008 and 2009 when the economy slowed and oil prices fell.
Again there are no guarantees about the future of Transocean, however it is a mistake to assume that they are in the same kind of trouble as their partner, British Petroleum.
Other News about Transocean:
- Workers could have called a “time-out”
- Transocean issues statement of clarification
Other Stocks in the News:
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Joshua Caucutt is long-time market follower and finance writer. Debt management, entrepreneurship and government economic policy are areas of emphasis. He regularly contributes to the Stock of the Day analysis.
If you watch the interviews on C-span. It is clear that Transocean was at fault. They did not maintian their fire protection equipment. It was not working properly before the accident. Bp should sue them.