Transocean (NYSE: RIG), the world’s largest offshore drilling contractor, has reached a $1.4 billion settlement with the U.S. Department of Justice (DoJ), to resolve civil and criminal disputes relating to the 2010 explosion of the Deepwater Horizon rig that the firm was operating for BP (NYSE: BP ), in the U.S. Gulf Of Mexico. The explosion and the sinking of the rig, resulted in the death of 11 crew members and caused the largest offshore oil spill in U.S. history. We view the settlement as a very positive development for Transocean since it allows the firm to put much of its legal woes behind it and focus its attention and resources on the booming deepwater drilling market. The firm’s stock was up by 6% in Thursday’s trading.
The blowout of the BP’s Macondo well, which was being drilled using a Transocean rig, led to a several month long ban and intense scrutiny on the practice of deepwater drilling. The accident brought about stronger regulations for offshore drilling and resulted in a series of lawsuits against BP and Transocean. Transocean’s stock price declined by around 40% following the spill.
Details of The Settlement
Under the terms of the settlement, Transocean will pay $1 billion in civil penalties and $400 billion in criminal penalties, over a 5-year period, and has agreed to plead guilty to a misdemeanor charge of violating the Clean Water Act. (Transocean, Justice Department reach $1.4B, Washington Post). Transocean will also be required to upgrade its rigs, to implement certain safety and emergency response equipment. The firm has already provided for losses totaling around $2 billion relating to the incident, with around $1.5 billion set aside for the DoJ settlement.
What The Settlement Means For Transocean And What Lies Ahead
The U.S. Gulf of Mexico is Transocean’s most important geographic market with 14 deepwater and ultra-deepwater rigs, under contracts in the region. Each of the rigs garner day rates of over $500,000.
We believe that the resolution will remove a lot of uncertainty for the firm and its investors, who were apprehensive about the magnitude of the losses that the firm could face due to the settlement. The deal will also have a slightly smaller impact on the firm’s finances, given that the final settlement will be around $100 million, less than the $1.5 billion that the firm had estimated. Although the market for offshore drilling is booming, it is also likely to become increasingly competitive. With the settlement out of the way, the firm will be able to move some resources away from legal issues, and increase its focus on making its deepwater business more competitive.
However, some risks still remain. Firstly, the firm has yet to settle a plaintiffs committee representing over 100,000 individuals and businesses, who are claiming economic and medical damages relating to the spill. These settlements could result in the total costs of the spill rising to as much as $4 billion, according to an analyst with UBS. 
Secondly, according to a filing with the SEC, Transocean mentioned that by pleading guilty under the Clean Water Act, it could be subject to suspension and debarment from participating in U.S. Government contracts. If the firm is suspended, it may be prohibited from working on contracts for companies that hold offshore drilling leases from the U.S. Department of Interior. However, the firm said that it was working with government agencies to avoid this issue. 
We have a $56 price estimate for Transocean, which is around 14% ahead of the current market price.