We are adding Transocean Ltd to our ValueHuntr Portfolio as an opportunistic and contrarian buy. At the same time, we are adding BP as a short.
It is our view that the uncertainty surrounding the Deepwater Horizon incident has caused RIG to trade far below a reasonable price. Meanwhile, we believe that most liabilities for cleanup will legally fall under BP. Even if RIG’s reputation is adversely affected by this incident, the company is the top deepwater driller in the industry. Unlike BP and other companies, RIG’s competitive advantage is its capability to operate in some of the harshest ocean conditions in the world.
Company
Transocean Ltd is a leading international provider of offshore contract drilling services for oil and gas wells. As of February 3, 2009, the company owned, had partial ownership interests in or operated 136 mobile offshore drilling units. The fleet consists of 39 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 28 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and four Other Rigs. In addition, the company has 10 Ultra-Deepwater Floaters under construction or contracted for construction.
Valuation
The company is now trading at some of the lowest multiples throughout its history. The company trades at P/B of 0.88, relative to industry average of 2.44. Additionally, the company is now trading at EV/EBITDA of 5, the lowest ever for the company. A word a caution is that although these numbers look attractive, their attractiveness is dependent on the effect the Deepwater Horizon incident has on the company’s operating income. As we discuss below, we believe RIG will be able to cover its liabilities without permanently impacting the company’s future operating income.
Deepwater Horizon Incident
On April 28, 2010, in connection with the Deepwater Horizon incident, one of RIG’s subsidiaries was notified by the U.S. Coast Guard that, under the provisions of the Oil Pollution Act of 1990 (“OPA”), Deepwater Horizon had been designated as a source of oil discharges and the subsidiary has been designated as a responsible party under OPA. In the notice, the U.S. Coast Guard noted that its information indicates that oil discharges resulting from the incident include discharges from Deepwater Horizon on or above the surface of the water and ongoing discharges from the well head. Because the ongoing discharges from the well head are occurring nearly a mile below the surface of the water, for which RIG believes it has no responsibility under OPA, the company has responded to the U.S. Coast Guard’s notice and denied our subsidiary’s designation as a responsible party to the extent of any underwater discharges from the well head.
While RIG’s potential liability in the oil cleanup is not understood with 100% certainty, there are several points that indicate that RIG’s liability is limited:
- RIG was fully insured for the Deepwater Horizon and has received $401MM to cover damages (seehttp://www.chron.com/disp/story.mpl/business/6992073.html )
- The total insured value of the rig is $560 million. But Transocean’s insurance also provides up to $1 billion in liability coverage, subject to deductibles, for personal injury claims and possible claims related to wreck removal.
- Although more than 100 lawsuits have already been filed in many states and courts, Transocean is petitioning that the limit of its liability be $26.76MM, as the entire value of its interest in the rig does not exceed this figure. Limitation of Liability comes from 150 year-old maritime law allowing US ship owners to limit their financial liability. Under the Limitation of Liability Act of 1851, a vessel owner is liable only for the post-accident value of its vessel and cargo, as long as the vessel owner can show it had no knowledge of negligence in the accident. Certain types of drilling rigs, such as MODUs (Mobile Offshore Drilling Units) like the Deepwater Horizon are considered vessels under U.S. maritime law because they are capable of being navigated.
Disclaimer: This is not a recommendation to buy or sell any securities. We do not personally own shares in RIG, BP.
Valuehuntr
http://valuehuntr.com
It is our view that the uncertainty surrounding the Deepwater Horizon incident has caused RIG to trade far below a reasonable price. Meanwhile, we believe that most liabilities for cleanup will legally fall under BP. Even if RIG’s reputation is adversely affected by this incident, the company is the top deepwater driller in the industry. Unlike BP and other companies, RIG’s competitive advantage is its capability to operate in some of the harshest ocean conditions in the world.
Company
Transocean Ltd is a leading international provider of offshore contract drilling services for oil and gas wells. As of February 3, 2009, the company owned, had partial ownership interests in or operated 136 mobile offshore drilling units. The fleet consists of 39 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 28 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and four Other Rigs. In addition, the company has 10 Ultra-Deepwater Floaters under construction or contracted for construction.
Valuation
The company is now trading at some of the lowest multiples throughout its history. The company trades at P/B of 0.88, relative to industry average of 2.44. Additionally, the company is now trading at EV/EBITDA of 5, the lowest ever for the company. A word a caution is that although these numbers look attractive, their attractiveness is dependent on the effect the Deepwater Horizon incident has on the company’s operating income. As we discuss below, we believe RIG will be able to cover its liabilities without permanently impacting the company’s future operating income.
Deepwater Horizon Incident
On April 28, 2010, in connection with the Deepwater Horizon incident, one of RIG’s subsidiaries was notified by the U.S. Coast Guard that, under the provisions of the Oil Pollution Act of 1990 (“OPA”), Deepwater Horizon had been designated as a source of oil discharges and the subsidiary has been designated as a responsible party under OPA. In the notice, the U.S. Coast Guard noted that its information indicates that oil discharges resulting from the incident include discharges from Deepwater Horizon on or above the surface of the water and ongoing discharges from the well head. Because the ongoing discharges from the well head are occurring nearly a mile below the surface of the water, for which RIG believes it has no responsibility under OPA, the company has responded to the U.S. Coast Guard’s notice and denied our subsidiary’s designation as a responsible party to the extent of any underwater discharges from the well head.
While RIG’s potential liability in the oil cleanup is not understood with 100% certainty, there are several points that indicate that RIG’s liability is limited:
- RIG was fully insured for the Deepwater Horizon and has received $401MM to cover damages (seehttp://www.chron.com/disp/story.mpl/business/6992073.html )
- The total insured value of the rig is $560 million. But Transocean’s insurance also provides up to $1 billion in liability coverage, subject to deductibles, for personal injury claims and possible claims related to wreck removal.
- Although more than 100 lawsuits have already been filed in many states and courts, Transocean is petitioning that the limit of its liability be $26.76MM, as the entire value of its interest in the rig does not exceed this figure. Limitation of Liability comes from 150 year-old maritime law allowing US ship owners to limit their financial liability. Under the Limitation of Liability Act of 1851, a vessel owner is liable only for the post-accident value of its vessel and cargo, as long as the vessel owner can show it had no knowledge of negligence in the accident. Certain types of drilling rigs, such as MODUs (Mobile Offshore Drilling Units) like the Deepwater Horizon are considered vessels under U.S. maritime law because they are capable of being navigated.
Disclaimer: This is not a recommendation to buy or sell any securities. We do not personally own shares in RIG, BP.
Valuehuntr
http://valuehuntr.com
