RIG’s Deepwater Woes Weigh on Stock, Large Upside Still Remains

Governments across the world are putting deepwater exploration under increased scrutiny since the Gulf of Mexico spill and the recent spill of the coasts of Brazil and China. ^[1] Deepwater driller Transocean (NYSE:RIG) may find these moves disconcerting as higher regulations are expected to increase the costs of exploration and make investments in deepwater more difficult, decelerating the trend towards offshore drilling. In a recent move, Brazilian prosecutors are looking to prosecute employees from Transocean and client Chevron (NYSE:CVX) while also pursuing damages of around $10 billion and pushing for a suspension on the Brazilian operations of the two companies. A large part of Transocean’s revenues are from its ultra deepwater drilling rigs and strict regulations could push up costs while reducing demand.

Click here for our full analysis of Transocean.

Greater oversight

Ultra deepwater drilling came under attack back last year when Transocean’s Deepwater Horizon sank off the Gulf of Mexico killing 11 people and resulted in a spill that leaked millions of barrels into the sea. Transocean’s involvement with the much smaller spill off Brazil’s coast has not done much to help its image while strengthening calls for tougher regulations on the deepwater sector.

The Brazilian government has responded aggressively, a move that some analysts criticize as ‘overreacting’. Calls to impose further regulations also gained strength with an offshore spill in China at a Bohay Bay facility operated by ConocoPhillips. ^[1]

In response to these incidents, governments have stepped up oversight, looking into how firms drill into high pressure underwater deposits and increasing the penalties on incidents. Higher penalties are expected to push up exploration costs which could slow down investments in offshore Brazil as well other deepwater regions across the world.

Transocean’s ultra deepwater fleet is an important asset for the company and is presently running at almost full capacity with contract backlogs extending for most of 2012. ^[2]

A decline in deepwater investments could impact the company’s utilization rate as well as its day rates. Decreasing these two parameters significantly impacts our price estimate for Transocean.

We have a $70 price estimate for Transocean, which is at a 75% premium to its current market price.

Understand how a company’s products impact its stock price on Trefis.

1. Chevron, Conoco Entrapped in Post-BP Government Crackdown on Oil Slicks, Bloomberg [↩] [↩]
2. Oil Firms Face Services Hurdle, WSJ [↩]