Transocean's (RIG) settlement with the Department of Justice on Thursday changes my short-term view on the stock, if not my long-term one. But for the next few weeks there is a catch-up momentum that should drive shares higher and I am looking to buy even after the strong rally yesterday.
Off shore isn't in general where I want to be in 2013. As supplies on shore continue to increase while demand in the U.S. continues to slacken, there are simply better investments in scale on where to get crude oil. And I say crude oil specifically. There will be another slack year in natural gas prices making the specific quest for crude oil volume growth the most profitable play in the energy sector again. Offshore drilling continues to yield greater percentages of natural gas to crude and operations must take into account the production of both. Furthermore, off shore continues to not only get more and more expensive as it needs to drill more deeply and more horizontally, it also becomes more dangerous, as Macondo showed as well as the RDS Shell drill rig grounding in Alaska so recently reminded us. As priorities go for investing in energy, off shore is not currently on the top of my list.
But inside the offshore sector, no single stock has gotten as beaten up as Transocean as it waited, now for more than two years, as the outcome of the horrible Gulf of Mexico BP Macondo spill made its way through the Federal agencies for final disposition. With this $1.4 billion settlement, Transocean did fantastically well. Most on the Street expected not only a longer road to final settlement, but even a midrange estimate of fines to amount to close to $3 billion with a possibility, if all of the clean water act statutes were applied to their maximum, of perhaps as much as $12 billion in fines. The boys of RIG in Switzerland are celebrating today.
The shares have been under an incredible cloud, waiting for this settlement to come down, hovering around $45 a share for most of the second half of 2012 before exploding yesterday. At this point, there should be more room to run. Just to catch up to the rest of the offshore sector should put value of the shares closer to $60.
There are other issues for the Swiss driller. It still needs capital to complete the Macondo-inspired upgrades necessary to continue to be by far the dominant deep-water driller. Its book for rig leasing is full for 2013 and most of 2014, but there are questions going forward from there and the rates that can be charged based upon crude oil and nat gas prices. I believe there is a dilutive secondary stock offering that the Swiss are waiting for an opportunity to float.
But for the short term, there is catch-up to do and even the possibility that some of the money put aside for liabilities no longer needed for Macondo might be used to reestablish its dividend, which was cut in 2011. That would also boost shares. With all that is going for them in the short term, at least for now, it's a buy.