Transocean – Gulf Oil Spill

By Brad Thomason, CPA

 

Oil is rising from the floor of the gulf, and the stock of one of the players is falling.  As a result of the unexplained rig explosion last week (4/20) one of the scariest oil slicks in history is growing and starting to move about, less than a hundred miles off the southern US coast.  The blame game is already starting, with most fingers pointing at rig operator Transocean.

Transocean’s stock (RIG) is down about $5 right now on the day; down about $10 from its most recent high ($90 down to $80), and nearly $15 off its 52-week high of $94 and change.  But earlier today it traded down even lower to $78, which is below recent support levels.  In the days to come there is a good chance it could fall even further.

The stock will likely fall because people who own it will want to get out while the bad news rolls in.  Some people will predict that the company will have major, costly problems in the near future, making the stock truly worth less than they thought it was worth before the accident.  Others will just want to avoid the inevitable down leg.  Either way, their selling action will drive the same result: lower prices.

This may end up being such a big problem for RIG that it will eventually bankrupt the company.  There’s really no way to know.  Government investigations and a flood of lawsuits can bring down anyone if they occur in sufficient volume.  That said, the future probably holds a different outcome.  Once the spill is stopped and the clean-up underway, the news will slow and then go away all together.  RIG will likely continue doing business as usual – a lucrative business, providing a much-needed service in an expert and competent way – and its stock price will eventually recover.  That’s why I mention it, and why you need to keep your eye on it.

Consider the following:

There has to be someone to blame, and RIG is the leading contender.  That points to short-term price declines.

They may not be assigned any culpability, but even if they are deemed responsible, the precedent is that only a portion of the cost for all of this will be assessed to them.  In any event of this type the bulk of the cost gets picked up by the public coffers.  Especially if they are not found to be grossly negligent (like commanding a vessel that runs aground and breaks apart while being, shall we say, impaired), then their portion will likely be fractional.

But fractional or not, it could still be a big number.  That’s a threat, right?  Yep.  For their insurance carriers.  I imagine RIG’s executives aren’t getting a lot of sleep these days.  I suspect their insurers (the primary is Lloyds) are getting a lot less.

So to sum up, we really have nothing but history (of similar past events) and speculation to go on today.  I do not think any of this is actionable in the here and now, and the scenarios I have described may prove very different than what plays out over the next 6 months or so.

But the bottom line is this: no matter how far down the stock goes, assuming this event doesn’t kill the company, if they are still out there doing what they do and making money at it, the stock’s price will start going back up sooner or later.  No point in not being along for the ride when it happens.

So file this away.  Don’t short the stock (unless you’re into that sort of thing), because the price may not fall that much more once new details become known.  Don’t do anything.  Just watch.  See if the price declines over the next few weeks.  Then keep watching.  At some point in the future, once the problem has been contained, once the media has moved on to the next story, once the uncertainty over the fallout has been removed, and most importantly once the price has stopped falling and the low has been tested a couple of times, the time could be right to step in for the ride back up.

That’s how you play value situations, especially ones where the down leg is heavily news-driven.  Keep RIG on your watch list.

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