Transocean, along with BP, Halliburton and Cameron, has seen its stock price and overall market valuation take a serious hit in the last two weeks as a result of the Deepwater Horizon incident and subsequent oil spill.
In the weeks leading up to the loss of the Deepwater Horizon, Transocean's stock price had climbed steadily from about $79 in late February to above $90 in the days before the tragedy. On April 20th, just hours before the rig apparently took a kick from the Macondo well, Transocean's stock had closed at $92.03. That marked its highest valuation since January, and brought the company's stock price close to the lower end of its 2007-08 trading range.
As with BP's stock price, Transocean's stock only took a small dip after news of the explosion and then the sinking of the Deepwater Horizon. But over the course of the subsequent week, the stock lost nearly 20% of its value as the magnitude of the oil spill became clear. That represents a $6 billion decrease in the company's market cap from $30 billion to $24 billion.
Investor's reaction to the loss of the Deepwater Horizon has clearly overshot the lost revenue from the rig's ongoing contract with BP. The rig was contracted to BP until the end of September 2013 at a day rate just under $500,000. Looking at the net present value of the contract over that period, Transocean has lost about $590 million worth of revenue that the Deepwater Horizon would have generated. That is approximately 2.5% of the company's $23.5 billion net present value for its already contracted rig time between May 2010 and September 2013.
Beyond the 2013 time frame, the company could likely have a new rig to replace the Deepwater Horizon and begin generating similar revenues. The Horizon was a dynamically positioned semisubmersible rig rated for drilling in 10,000ft of water that had been delivered in 2001 at cost of $365 million. The rig was insured for replacement cost, which will likely run about $500 million.
There are currently nine similarly equipped semisubs under construction around the world, all of which were ordered in 2008. Those rigs range in cost from $385 million to $750 million with an average cost of $590 million. Each of those rigs is scheduled to take 3.5 to 4 years to be comlpeted, with most entering the market in 2011 and early 2012. With the reduction in rig building demand and lower material prices, Transocean would likely see a price tag markedly below the peak cost for rigs ordered in 2008.
Given the facts that the Horizon was just one of 140 jackups, semisubs, and drillships in Transocean fleet, that it contributed less than 2% of the company's revenue and that the rig could be replaced within 4 years, the overall economic impact for the company is quite small. It may justify as much as a 3-5% drop in stock price, but certainly not a 20% decline in market cap.
Of course, concerns are focused squarely on the uncertain longer term impact of this event, since Transocean is likely to bear some responsibility for damages as a result of the oil spill in the Gulf of Mexico. With at least 31 lawsuits having been filed by various parties ranging from condominium owners on the Gulf Coast to the families of the lost rig workers, Transocean will have significant legal costs to bear. How significant will depend on a variety of factors outside the company's control, including the weather in the Gulf and how much oil makes it to shore.
In addition, there is likely some concern amongst investors that Transocean may experience a harder time landing contracts or see reduced day rates as a result of the incident. Whether these concerns prove valid with respect to Transocean's competitive advantage remains to be seen.
However, if the US goverment restricts offshore or deepwater drilling because of this incident, Transocean has significant exposure with 15 deepwater rigs earning an average of nearly $500,000 per day in the Gulf of Mexico. These rigs represent more than a quarter of the company's current revenue. While the rigs all have firm contracts, some revenue could be lost if rigs must undergo more rigorous inspections, halt drilling or leave the region.
In the end, Transocean still has the world's largest offshore rig fleet, an industry-leading reputation, and a very capable and dedicated workforce that will carry the company through this time of crisis. While the company's value may be down, its long term potential is still very strong.
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