Transocean (NYSE:RIG) announced on Thursday that it was served with a preliminary injunction by a federal court in Rio de Janeiro requiring that it cease operations in Brazil within 30 days.  The move by the court follows civil lawsuits seeking up to $20 billion from Transocean and Chevron (NYSE:CVX), relating to an oil spill last November at the Frade well off the coast of Rio de Janeiro. The Frade well was operated by Chevron Corp, with drilling carried out using a rig leased from Transocean. Transocean is perusing its legal options to overturn or suspend the injunction, including an appeal to the Superior Court of Justice.
Transocean, the world’s largest offshore drilling contractor, earns its revenues primarily by renting out drilling rigs to oil exploration and production companies. Drilling contracts are negotiated for payments on a daily rate basis, earning higher rates when rigs are active and lower rates during periods of mobilization or maintenance.
Brazil A Sizzling Market For Offshore Drilling
Brazil has recently emerged as one of the most sought after regions for oil exploration, following promising discoveries in offshore sub-salt areas by government controlled energy giant Petrobras. The country has about 13 billion barrels in proven oil reserves. Some experts estimate that reserves in the sub-salt regions could be as high as 100 billion barrels. 
Transoceans Presence In Brazil
Transocean is a major player in the Brazilian offshore drilling space, accounting for almost 13% of the country’s drilling fleet. The company has a total of 9 rigs that are actively drilling in Brazil, 8 of which are leased to Petrobras. Data provided by RigLogix shows that of the 9 rigs in operation, 6 were semi-submersible rigs and 3 were drillships.
The stakes are equally high for Petrobras - failure to get the ruling overturned would bring to a halt exploration and production activity in some of the companies most promising oil fields. It is understood that Petrobas is working with Transocean to help fight the ruling. 
Implications for Transocean
During the first half of the year, Brazilian operations contributed to around to 11% of Transocean’s overall revenues. We believe that if Transocean fails to get relief from the Brazilian courts, its average daily revenues and fleet utilization levels would be negatively impacted in the short term, as the rigs located in Brazil would not generate any revenues.
Considering the immense potential that the Brazilian offshore drilling space offers, we will be closely watching the progress of this case and its implications on the future of Transocean’s business in the country. Depending on the outcome, we may re-evaluate our price estimate for the company as necessary.
We currently have a prices estimate of $55.46 for Transocean, which represents a 20% upside from the current market price.Notes: