), the world's largest offshore drilling contractor, has reached a
$1.4 billion settlement with the U.S. Department of Justice (DoJ),
to resolve civil and criminal disputes relating to the 2010
explosion of the Deepwater Horizon rig that the firm was operating
for BP (NYSE: BP ), in the U.S. Gulf Of Mexico. The explosion
and the sinking of the rig, resulted in the death of 11 crew
members and caused the largest offshore oil spill in U.S.
history. We view the settlement as a very positive development
for Transocean since it allows the firm to put much of its legal
woes behind it and focus its attention and resources on the booming
deepwater drilling market. The firm's stock was up by 6% in
The blowout of the BP's Macondo well, which was being drilled
using a Transocean rig, led to a several month long ban and intense
scrutiny on the practice of deepwater drilling. The
accident brought about stronger regulations for offshore drilling
and resulted in a series of lawsuits against BP and Transocean.
Transocean's stock price declined by around 40% following the
Details of The Settlement
Under the terms of the settlement, Transocean will pay $1
billion in civil penalties and $400 billion in criminal penalties,
over a 5-year period, and has agreed to plead guilty to
a misdemeanor charge of violating the Clean Water Act. (
Transocean, Justice Department reach $1.4B
, Washington Post). Transocean will also be required to upgrade its
rigs, to implement certain safety and emergency
response equipment. The firm has already provided for
losses totaling around $2 billion relating to the incident, with
around $1.5 billion set aside for the DoJ settlement.
What The Settlement Means For Transocean And What Lies
The U.S. Gulf of Mexico is Transocean's most important
geographic market with 14 deepwater and ultra-deepwater rigs, under
contracts in the region. Each of the rigs garner day rates of over
We believe that the resolution will remove a lot of uncertainty
for the firm and its investors, who were apprehensive about the
magnitude of the losses that the firm could face due to
the settlement. The deal will also have a slightly smaller
impact on the firm's finances, given that the final settlement will
be around $100 million, less than the $1.5 billion that the firm
had estimated. Although the market for offshore drilling is
booming, it is also likely to become increasingly competitive. With
the settlement out of the way, the firm will be able to
move some resources away from legal issues, and increase its focus
on making its deepwater business more competitive.
However, some risks still remain. Firstly, the firm has yet to
settle a plaintiffs committee representing over 100,000 individuals
and businesses, who are claiming economic and medical damages
relating to the spill. These settlements could result in the total
costs of the spill rising to as much as $4 billion, according to an
analyst with UBS.
Secondly, according to a filing with the SEC, Transocean
mentioned that by pleading guilty under the Clean Water Act, it
could be subject to suspension and debarment from participating in
U.S. Government contracts. If the firm is suspended, it may be
prohibited from working on contracts for companies that hold
offshore drilling leases from the U.S. Department of Interior.
However, the firm said that it was working with government agencies
to avoid this issue.
We have a
$56 price estimate for Transocean
, which is around 14% ahead of the current market price.
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