Transocean (RIG) is the owner of Deepwater Horizon, the drilling rig that caught fire on April 20 and eventually sank in the Gulf of Mexico with the loss of 11 workers. Those workers are still missing but presumed dead. Oil continues to leak from the well 4,500 feet below the surface.
Today, April 27, the U.S. Coast Guard will try to set some of the huge spill on fire as a way to reduce the danger to the Louisiana coast and the Gulf of Mexico.
I by no means want to say that this human and ecological disaster should be measured in dollars and cents, but let’s face it, the cost of this tragedy is what will drive the price of Transocean shares in the short-term.
The rig that was destroyed was one of Transocean’s most advanced rigs. Replacing it will cost about $700 million. Most of that–$560 million, according to Transocean–will be covered by insurance. The rig was set to begin a new three-year contract with BP (BP), the owner of the well, in September at a rate of $497,000 a day. At the current day rate of $500,000, lost revenue on the remaining five months of the rig’s contract to BP is close to $75 million. That’s equal to less than 1% of 2009 annual revenue for Transocean.
The Deepwater Horizon won a safety award from the U.S. Minerals Management Service in 2009 and the agency didn’t find any safety violations during three safety inspections this year. That, of course, doesn’t preclude law suits from the families of the missing workers.
The biggest unknown is the size of the bill for the ocean cleanup work and for any possible damage to coastal areas with their valuable mix of beaches, oyster beds, and wildlife refuges.
 BP estimates that the cleanup cost is running at $6 million a day. But the flow of oil from the well still hasn’t been stopped.
Post-fire earnings estimates by C.K. Cooper & Co. shave 2010 earnings per share to $9.05 from a previous $9.35 and 2011 estimates to $11.30 from $11.70. That seems like a reasonable estimate to me.
The big worry is that there’s no way to estimate the impact of continued stories about the disaster and the approach of the oil slick to the Louisiana coast on Transocean’s share price. Obviously the longer oil continues to flow from the well, the larger the potential damage and final bill. The stock was having trouble getting through strong resistance in the $85 to $90 range even before the disaster. (Part of the problem has been the falling price of oil. For more on the threat to oil prices from OPEC cheating see my post https://jubakpicks.com/2010/04/19/opec-cheats-on-production-quotas-oil-prices-fall/ )
Since then the stock has clearly been out-performed by the shares of other drilling and oil service sector stocks such as Schlumberger (SLB) and Weatherford International (WFT).
I’m inclined to wait to see what the company announces in its first quarter earnings report on May 5 and in the May 6 conference call. There’s a good chance that management will be able to reduce the uncertainty surrounding the stock. That in itself would give a boost to the stock price.
If I don’t like what I hear, however, it will be time to move to another horse in the sector. As of April 28, I’m leaving my target price at $105 by November, 2010.
 Full disclosure: I own shares of Schlumberger and Transocean in my personal portfolio.
Interesting, WFT is down 3% as I type and RIG is up a half. The world is a strange place.
There’s no doubt that this is a potentially big environmental disaster if the oil gets ashore in the Gulf. But I don’t see that today’s news on the increased volume of the leak changes the fundamentals for RIG very much. The one thing that coiuld change that is evidence of negligence. So far I don’t see that although I’m sure that someone will try to argue in court that the lack of an remote shutdown valve of the tye required in Brazil and Norway constitutes negligence. Not required here but I suspect it will be after this accident.
Thanks for the update Jim. It’s a sad turn of events.
I sold RIG on 4/23 for $90.02 on the day I posted my note. Since then it has taken a big hit. Currently at $79.93. Will consider buying it back or buying WFT (recommended by Cramer) if this doesn’t turn into a catastrophic disaster that puts a crimp in deep water drilling.
Just saw NYTimes headline that it may be spilling 5000 barrels per day. Compare this to what happend at West Atlas last August (Australia’s worst offshore oil leak) which spilled up to 2000 barrels/day over 10 weeks. Near as I can tell there were no immediate tangible effects from West Atlas (from an investors’ standpoint). This event has >2X oil and is >2X as close to shore. An autralian commision report on the incident is due out tomorrow. If that report gets picked up by mainstream media it could be bad for Transocean and offshore drilling in general (and good for my home state FL, IMHO)
I got out of oil at the right time, specifically BP!
I would point out to those of you who knock BP or RIG about safeguards, how much oil has BP lost to this disaster? How much money have they lost? And that doesn’t even begin to cover the PR disaster.
Assuming they cut corners to save money, and that hasn’t been proven, the amount of money they’ve lost in this is phenomenal!
I can’t speak for BP or RIG, but most companies today are VERY safety conscious. You only have to look at the results of this situation to see why. Don’t confuse BP with Goldman Sachs. When Goldman screws up, the worst case is somebody gets screwed out of their money. When BP screws up, it can be fatal.
Mind you, that doesn’t mean an employee for BP or RIG didn’t knowingly ignore safety precautions. But those companies should not be held morally liable for the actions of a stupid employee (although they will inevitably be held legally liable), unless it is shown the management(s) intentionally authorized the actions.
Sold RIG last year. Did OK, but not missed the greatest selling point.
God bless all who involved!
More information about insurance would be very helpful. The “media” seems to Ignore this in reporting disasters of this type. Who is responsible for this financial cost: RIG or BP and how much of all of these cost are covered by various types of insurance?
Brings a whole new meaning to Palin’s “Drill baby drill!” remark. Perhaps it should be “Spill baby Spill!” And they want to use the same technology to drill in the Artic Sea. But they (BP) are seeking a special permit to avoid using even the safeguards that were in place in the gulf because of the high cost of drilling in the Artic.
Most importantly, what will this do to the midterm drilling prospects. The spill is already 40 by 80 miles. Florida Gov. Christ flew over it yesterday and he got reminded of why he opposed drilling off the coast of FL until a year ago. As of last evening when he returned, he took back his “no drilling” position.
Ironically, today the Cape Cod Wind Power project was approved.