Is History Repeating Itself for Transocean?

I recently wrote about how Transocean's (NYSE: RIG  ) latest earnings could be misleading, since paper losses are a big part of the company's latest financial statements. While revenues generated were pretty much in line with those of the previous year, asset writedowns and contingency costs associated with the Macondo well blowout dragged the company into net losses in 2011.

Fool community member artmuseum noted that any analysis of the Swiss drilling contractor needed to take into account the latest oil spill off Brazil's coast. Good point. Here goes.

What's happening in Brazil?
A spill in the Frade Field off the Brazilian coast last month has raised eyebrows. Federal prosecutors in Brazil are suing Transocean and Chevron (NYSE: CVX  ) for $11 billion in a civil lawsuit. This is over and above a previous lawsuit against the companies -- again amounting to $11 billion -- which was filed following a 3,000-barrel spill in November. Additionally, the federal prosecutor has charged 17 employees of the two companies; convictions could carry jail sentences up to 31 years.

According to Chevron, which operates the field, with Transocean being the drilling contractor, hardly a barrel of oil was leaked in March. This has led analysts and critics to wonder about the merits behind the second lawsuit.

But whether or not the lawsuit holds water, investors are bound to be worried about the next move. So what really is in the offing?

What next?
This could be tricky to answer. For now, Brazil's oil regulator has suspended all drilling activities in the Frade Field. This will also affect the state-owned Petrobras (NYSE: PBR  ) , which holds a 30% stake in the field. In fact, following the first spill, former CEO Jose Sergio Gabrielli said that the partners may have to cough up their share of costs for any damages won against Chevron.

Much of the lawsuits pertain to environmental issues. Some of these accidents have been viewed by the drilling industry all along as something unavoidable.

Additionally, Brazil's largest union of oil workers has long opposed "foreign involvement in Brazilian oil development." Which is why things look pretty bleak right now. At the center of the controversy is Transocean's Sedco 706 semi-submersible rig capable of drilling below 6,000 feet of water to a depth of 25,000 feet. In total, the company has nine rigs, including Sedco 706, operating in the waters off Brazil. Some of them are drillships capable of drilling in ultra-deepwater regions.

Last year, Brazil constituted 10% of Transocean's total assets and 11% of total revenue. That's a considerable chunk. If cash flows from this region dry up, this could mean serious trouble for the company. Meanwhile, the Gulf of Mexico disaster hasn't been put to rest.

Foolish bottom line
Transocean could be heading for trouble with the ghosts of the Gulf spill still haunting it. However, my gut feeling says these draconian charges leveled by Brazilian prosecutors are not going to pose a huge problem. The incidents do not warrant such measures. A minor problem, maybe. But definitely nothing that justifies a ridiculously high $22 billion case. But whichever way it turns, The Motley Fool will help you stay up to speed on the top news and analysis on Transocean. All you need to do is add the company to your free watchlist.

If you're looking for more ideas, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Transocean. Motley Fool newsletter services have recommended buying shares of Chevron and Petrobras. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 17, 2012, at 9:40 PM, Saratogahawk wrote:

    So many issues are wrong in this article that it barely earns my comments. I do my research first. You should do the same. You should look at the comments of ANP in Brazil. They said clearly that the Prosecutor was way over reaching. Also, the field is owned by CVX and PBR not by RIG. PBR even agrees that it is potentially liable for at least 30% of the final damages. You should mention that the asset writedowns are "goodwill" writedowns and do not affect the balance sheet. You should mention that RIG is getting some of the highest day rates in the industry and has the largest ultradeep water fleet (the most profitable part of the market). You should mention that the trend is significantly upwards on day rates for ultradeep water drilling rigs. You should mention that RIGs bop recerts and shipyard time drops dramatically with the end of Q2. You should mention the currency hedges that RIG took losses on last quarter. those could be profitable or breakeven at some time. You really should note that the Macondo legal decisions have so far very much supported RIG's position and that the company has reserved a billion for damage claims so the expected downside is already known. You should mention that several other drillers have much larger vested interests in Brazil than RIG and would be hurt even more if Brazil crashes for outside drilling companies. all in all you have so many poorly identified points that I can't believe that I still pay Motley for a membership.

    By the way. I do know what I am talking about.

  • Report this Comment On April 17, 2012, at 9:45 PM, Saratogahawk wrote:

    Isac, please do not mistake my points for a personal assault. RIG certainly has its problems but not in the way you imply and surely much less than some others right now. By the way, why don't you compare the profitability for companies with the largest udw fleets vs companies with the largest jackup fleets. I think you will find that RIG has enormous upside in that analysis while ESV, DO, NE are somewhat limited by the mix of equipment. Nonetheless, if one has to pick the driller of choice it would be SDRL right now for udws, harsh environments and semitender/tenders. Best of breed.

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