Transocean Still Haunted by Oil Spill

Published in Investing on 1 March 2012

A contingency for a possible settlement relating to the BP oil spill pushed Transocean to a massive loss.

A version of this article originally appeared on our US site,

The ghosts of oil spills past are still haunting Transocean (NYSE: RIG.US). In the fourth quarter, the company reported a $1 billion estimated loss contingency in relation to the Macondo Well disaster, possibly indicating a settlement with BP (LSE: BP) is near. It might be a good thing to get that incident behind the company, so it can get back to more normal operations and back to profitability.

While most of the drilling industry is returning to normal, Transocean is treading water due to past mistakes. In addition to the $1 billion impairment, Transocean wrote down its contract-drilling unit to the tune of $5.2 billion. All of this led to a $6.1 billion, or a whopping $18.62 per share, loss. On an adjusted basis, earnings per share were $0.18.

At least revenue was up 8%, in contrast to Hercules Offshore (NASDAQ: HERO.US), which reported falling revenue due to its reliance on shallow water rigs. Transocean has a range of rigs and was able to offset any weakness there with strength in the deepwater segment.

Management said that the ultra-deepwater segment continues to be constrained and should be a driver of earnings in the future. Like SeaDrill (NYSE: SDRL.US) and Noble (NYSE: NE.US), Transocean has put its eggs in the ultra-deepwater segment, and it appears to be paying off slowly. Recent day rates have been in excess of $600,000 per day, and the constrained market should keep utilisation high.

Assuming there aren't any big surprises in an oil spill settlement, the writedowns should be about over. There's not as much goodwill left from previous acquisitions to write down after taking most of it out this quarter.

Foolish bottom line

The clouds over Transocean appear to be clearing, but I still think there are better drilling stocks out there. SeaDrill, my top pick, still pays a higher dividend and is reporting profitable earnings. We'll find out soon how its fourth quarter looked, but with positive comments out of the ultra-deepwater segment from Transocean and Noble, I expect good numbers.

> Get the latest on investing and the markets, direct from the desk of David Kuo. You'll also receive a special free report on '10 Steps To Making A Million' if you join The Motley Fool Collective today.

> Travis manages an account that owns shares of SeaDrill.

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