BMI View: Transocean's recent settlement over the 2010 Deepwater Horizon oil spill in the Gulf of Mexico has provided the company and its investors both closure and clarity for the future. Additionally, the US$1.4bn the company must pay in fines and penalties is less than expected, further contributing to the rise in share price. More importantly, this settlement will allow investors to focus on the fundamentals of the rapidly expanding offshore drilling industry, of which Transocean remains the leader.
Transocean has reached a settlement with the US Department of Justice over the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. The agreement includes a payment of US$1bn to resolve civil claims, as well as US$400mn in criminal penalties, both to be paid out over a five-year period, in addition to the company pleading guilty to one count of violating the Clean Water Act.
The January 3 settlement also clears Transocean of all future criminal and civil charges relating to the Macondo well oil spill, providing the company and its investors with much-needed clarity moving forward. For this reason, as well as the fact that the total fines and penalties were less than the amount Transocean had set aside, the company's stock price soared over 7% in intraday trading. Its equity performance had been in a decidedly negative downtrend ever since the 2010 spill, reaching multi-year lows in late 2012.
We believe that Transocean's equity is now poised for a rally, as the company's valuation and technicals look set to align with the broader fundamental picture. Indeed, the fundamentals of the sector continue to brighten, with the rapid global expansion of deepwater drilling leading to rising demand for deepwater rigs at increasingly high rates ( see our online service, December 24 2012, 'Offshore Exploration To Prove A Key Source Of OFS Growth'). Indeed, the sector's growth is being driven in particular by the 'Golden Triangle' of deepwater and ultra-deepwater interest in the Gulf of Mexico, offshore Brazil and offshore West Africa. In addition, massive natural gas discoveries off the coast of East Africa, as well as significant investment into the North Sea, are also expected to drive growth. Those companies that are in a position to successfully meet the increasing demand for deepwater and ultra deepwater drilling, such as Transocean, are in an excellent position over the medium and long term.
From a valuation perspective, Transocean remains relatively cheap. Indeed, its shares have lost approximately half of their value since the Deepwater Horizon spill, which erased its recovery after the 2008 financial crisis. Its current price-to-earnings (P/E) ratio is 8.2x, as compared to its 10-year average of 26.1x, and its price-to-book (P/B) ratio is a 1.0, as compared to a 1.6 10-year average. Given that these are very cheap, there is room for multiple expansions going forward.
The technical picture also looks very positive, as the company is currently breaking out of a multi-year downtrend to trade at over $50 at the time of writing. To be sure, the clarity provided by the settlement of Transocean's Deepwater Horizon liabilities has given its share price the boost needed to decisively break through long-term resistance. We now believe that this break could set the company up for at least a multi-month rise in its share price, helping it to regain some of the losses in recent years.
|Settlement Lifts Transocean Above Resistance|
|Transocean Share Performance (US$)|