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Transocean Soars on Settlement News

January 3, 2013 1:49 pm
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Transocean Soars on Settlement News

Shares of Transocean (NYSE: RIG), the provider of offshore drilling services, are soaring by 7.4 percent on volume that is well over twice the daily average after the company agreed to a $1.4 billion settlement with the U.S. Justice Department for its roll in the 2010 Gulf of Mexico oil spill.

Since the spill, the largest in U.S. history, BP (NYSE: BP), which operated Transocean’s Deepwater Horizon rig, has settled with the U.S. government for a record $4.5 billion. Other companies with exposure to the fatal spill, including Halliburton (NYSE: HAL), which provided cement services for the Macondo well, and Anadarko Petroleum (NYSE: APC), which held a non-operating interest in the project, settled with BP.

However, Transocean has been resolute in its desire to fight both its obligations to BP, Europe’s second-largest oil company, and defend its impugned global reputation.

Prior to the spill, Transocean, based in Switzerland due to what critics allege is no more than an effort to gain favorable tax treatment, was trading around $90 the day before the spill in April 2010. Following the deaths of 11 workers aboard the Deepwater Horizon, shares of BP, Anadarko and Transocean plunged precipitously. Transocean shares would fall to the $46 area only to rebound to $85 in the first quarter of 2011.

Since then, the stock has spiraled downward as analysts and investors fretted over what the company’s Gulf liabilities could potentially be. Arguably, Transocean’s desire to fight U.S. regulators and BP did more harm than good to the shares because it kept a dark cloud over the stock longer than necessary. Along the way, Transocean would also run afoul of Brazilian regulators due to a small 2011 spill at that country’s Frade Field.

While Brazilian prosecutors appeared overzealous in their approach to condemning Transocean and Chevron (NYSE: CVX), both companies were forced to suspend operations there. Brazil is the second-largest oil-producing nation in South America behind OPEC member Venezuela.

News of the DoJ settlement does remove some overhang for Transocean. Even though BP was profitable in 2011, Transocean took a $5.7 billion loss, some of which the company attributed to spill-related contingencies.

In addition to the 2011 loss, Transocean added to shareholders’ woes with a November 2011 secondary offering that diluted investors and the February 2012 announcement that the company would not pay a dividend.

Transocean has reserved $2 billion for the federal claims, as well as claims filed on behalf of workers who were killed or injured when the rig exploded that remain to be settled, according to the Associated Press. The company will pay the $1.4 billion penalty over five years.

Along the way, Transocean’s dwindling market value allowed rival SeaDrill (NYSE: SDRL) to become the largest offshore services provider. To be sure, Transocean’s misfortune has been SeaDrill’s gain. Over the past two years, shares of Transocean are off more than 33 percent while SeaDrill has jumped about 10 percent. The latter features a dividend yield of 9.1 percent.

With one of its darkest chapters presumably behind it, Transocean might be ready to offer value beyond short-term trades. The company added added $1.2 billion in contracts in November and December of last year meaning its order backlog is in the are of $30 billion.

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