Transocean $1.4 Billion Gulf Spill Deal Lures Investors: Energy

Transocean Ltd. (RIG)’s agreement to pay $1.4 billion in penalties for its role in the worst U.S. maritime oil spill frees the world’s largest offshore driller to attend to rising competition in deep-water rig markets.

Transocean will plead guilty to one misdemeanor count of violating the Clean Water Act as owner of the Deepwater Horizon rig that drilled BP Plc (BP/)’s ill-fated Macondo well off the Louisiana coast in 2010, according to a filing yesterday in federal court in New Orleans. The company is scheduled to be arraigned on the charge Jan. 9.

The Vernier, Switzerland-based driller will pay a $400 million criminal fine and $1 billion in civil penalties plus interest for the calamity that killed 11 workers, spewed millions of barrels of crude into the sea, and halted fishing for months across a Nebraska-size swath of the Gulf of Mexico.

Transocean shares surged the most in 28 months after the settlement was announced yesterday and yields on company debt fell, signaling rising investor demand. A “significant valuation recalibration” is in order for Transocean’s stock now that most of the uncertainty about potential liabilities for the Macondo accident has been resolved, said James C. West, an analyst at Barclays Capital Inc. in New York.

“The painful lesson learned for Transocean and these other companies involved in deep-water exploration is that going forward they have to put the environment ahead of profit,” said Laurence Balter, who helps manage $100 million, including Transocean shares, at Oracle Investment Research in Fox Island, Washington.

Largest Gain

Transocean rose 2.3 percent to $50.32 at 9:35 a.m. in New York Stock Exchange composite trading. Yesterday, the stock increased 7.9 percent for the largest intraday gain since September 2010.

Transocean’s 3.8 percent bonds maturing in October 2022 traded at 103.96 cents on the dollar yesterday to yield 3.32 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Transocean’s $1.4 billion settlement would be enough to build two state-of-the-art ultra-deep-water rigs of the sort that command rental fees of $500,000 a day.

“This settlement is definitely a strong positive for the company and should put the biggest issues regarding the oil spill behind them,” Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, said yesterday in an interview.

Transocean shares that lost half their value since the April 2010 blowout are undervalued and “highly attractive” at current prices, Barclays’ West said yesterday in a note to clients. The stock is trading at about 75 percent of the company’s net-asset value, compared with the 10-year average of 115 percent for the industry group, he said.

Manslaughter Charges

BP managers overseeing the Macondo project about 40 miles (64 kilometers) off the Louisiana coast were distracted by cost overruns and personal conflicts in the weeks preceding the disaster that destroyed the $365 million Deepwater Horizon rig, a joint U.S. Interior Department-Coast Guard panel said in a September 2011 report.

Two BP managers who were aboard the rig the night of the blowout were charged in November with involuntary manslaughter and other crimes. The men, Robert Kaluza and Donald Vidrine, have pleaded not guilty in federal court in New Orleans. A former BP executive, David Rainey, has been charged with obstruction of Congress and making false statements about the size of the spill. Rainey also has pleaded not guilty.

BP, Halliburton

The federal panel’s 2011 report found BP, as operator of the well, “ultimately responsible” for the accident and spill. The panel said Transocean and Halliburton Co. (HAL) also violated offshore safety regulations.

Halliburton, provider of the cement used in the well, is the sole remaining Macondo participant that hasn’t settled any possible incident-related liabilities, West said. Settling any such claims “should accelerate the company’s plans to hike its dividend and buy back stock,” West said in his note.

While Halliburton has been sued by private plaintiffs, the U.S. didn’t name Halliburton as a defendant in its oil-pollution lawsuit.

“Halliburton remains confident that all the work it performed with respect to the Macondo well was completed in accordance with BP’s specifications for its well construction plan and instructions,” Beverly Stafford, a spokeswoman for the Houston-based company, said in an e-mail.

Punitive Damages

BP has to indemnify Halliburton for compensatory damage claims under its drilling contract, U.S. District Judge Carl Barbier in New Orleans, who is overseeing litigation stemming from the spill, ruled last year. Any punitive damages awarded or civil penalties imposed under the Clean Water Act against Halliburton don’t have to be paid by BP, the judge said in January 2011.

Barbier also ruled last year that BP must indemnify Transocean for pollution-related economic damage claims under its drilling contract. Transocean said in court papers that it accepted responsibility for equipment losses and paying personal injury and death claims, citing contract provisions.

The judge said the indemnification meant that BP would be responsible for “compensatory damages asserted by third parties against Transocean related to pollution that did not originate on or above the surface of the water, even if the claim is the result of Transocean’s strict liability” or negligence or gross negligence.

Ensco, Noble

Almost three years after the disaster, Transocean still dominates the Gulf of Mexico’s deep-water drilling market. Fourteen of the 39 rigs actively drilling in Gulf water depths of at least 1,000 feet (305 meters) are owned by Transocean, more than any other operator, according to Dice Holdings Inc.’s Rigzone, which tracks global offshore rig data.

Transocean’s biggest rivals in the deep-water regions of the Gulf based on rig counts are Ensco Plc and Noble Corp., according to data compiled by Rigzone. Worldwide, Transocean operates a fleet of 82 offshore rigs, according to a statement published yesterday on the company’s website.

By pleading guilty to a violation of the Clean Water Act, Transocean and its affiliates “may be subject to suspension and debarment from obtaining future U.S. government contracts,” the company said in an SEC filing yesterday. If suspended, Transocean said it “may be prohibited from serving as contractors” to companies holding U.S. Department of Interior leases for offshore drilling.

Innovation Group

The U.S. Justice Department sued Transocean in 2010, alleging violations of federal pollution laws. Under the agreement announced yesterday, Transocean must establish a Technology Innovation Group to focus on drilling safety, devoting a minimum of $10 million to this effort.

“This agreement holds Transocean criminally responsible for its conduct,” U.S. Attorney General Eric Holder said yesterday in a statement. “This resolution of criminal allegations and civil claims against Transocean brings us one significant step closer to justice for the human, environmental and economic devastation wrought by the Deepwater Horizon disaster.”

The settlement will end the Justice Department’s criminal investigation of Transocean, the company said in a statement. Transocean had accrued an estimated loss contingency of $1.5 billion for claims by the Justice Department, as of Sept. 30, the company said.

The civil and criminal agreements, “which the company believes to be in the best interest of its shareholders and employees, remove much of the uncertainty associated with the accident,” Transocean said in the statement.

BP Plea Deal

BP, based in London, previously agreed to pay $4 billion to the Justice Department to resolve charges connected to the spill and $525 million to settle the U.S. Securities and Exchange Commission’s claim that the company misled investors about the rate of oil flowing into the Gulf.

BP announced Nov. 15 that it reached a deal with the Justice Department to plead guilty to 14 counts, including 11 for felony seaman’s manslaughter. U.S. District Judge Sarah S. Vance in New Orleans said last month she would determine at a Jan. 29 hearing whether to accept BP’s plea.

BP also agreed to pay an estimated $7.8 billion to settle most private plaintiffs’ claims related to the explosion aboard the Deepwater Horizon and subsequent spill.

Barbier granted final approval to the economic-loss and property-damage portion of the settlement last month. He hasn’t ruled on the medical benefits part of the agreement.

February Trial

Barbier has set Feb. 25 for a nonjury trial to apportion fault for the incident.

The BP private party settlement excludes claims of financial institutions, casinos, private plaintiffs in parts of Florida and Texas, and residents and businesses claiming harm from the Obama administration’s moratorium on deep-water drilling prompted by the spill. It also doesn’t cover federal government civil claims and those of Gulf Coast states Louisiana and Alabama, or lawsuits against co-defendants.

BP has also reached settlements with other participants in the Macondo project.

Anadarko Petroleum Corp. (APC), an explorer based in The Woodlands, Texas, owned a 25 percent stake in the well and agreed to pay $4 billion to BP to settle claims related to the spill. Mitsui & Co. (8031)’s MOEX Offshore 2007, which also owned an interest in the project, paid $90 million to settle Clean Water Act claims and $1.065 billion to BP.

Cameron International Corp. (CAM), which provided blowout- prevention equipment for the well, agreed in 2011 to pay $250 million to BP in exchange for the oil company’s indemnifying it from damage claims. That settlement doesn’t cover fines, penalties or punitive damages.

The criminal case is U.S. v. Transocean Deepwater Inc., 13- cr-00001, U.S. District Court, Eastern District of Louisiana (New Orleans). The civil case is In re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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