Value investors often look for opportunities where temporary circumstances have caused the market to unjustifiably depress prices. One such value-minded investor, Frank Voisin, may have uncovered such an opportunity. The following is a guest post where Frank makes his case for Transocean Ltd, a company whose stock has been punished as the massive oil leak on the Gulf of Mexico continues.
Transocean Ltd (RIG) is an international provider of offshore contract drilling services for oil and gas. Transocean is the largest such operator, with 138 mobile offshore drilling units, including 44 high-specification floaters which command the highest day-rates for use in the deepest, harshest drilling environments, 26 mid-water, 65 jack-ups, and 3 others.
On April 20, 2010, a Transocean rig leased to BP plc (BP), the Deepwater Horizon, suffered an explosion and sank two days later. The Deepwater Horizon was in the final stages of casing a well (adding a cement reinforcement liner to the well) when the explosion took place. The well was approximately 1 mile beneath the ocean surface, and extended approximately 5 miles underground. The explosion appears to have been the result of the cement casing not being fully cured, resulting in the release of a massive amount of pressure from the oil reservoir up through the well. Explosions of this sort are supposed to be prevented by a Blow-Out Preventer, a massive device (16m wide) with up to 12 different fail-safe mechanisms that can be manually activated to close over the well to prevent leaks and withstand the pressure. In this case, the Blow-Out Preventer was designed and built by Cameron International Corp (CAM).
The market appears to be expecting losses from this disaster to exceed a present value of $30 billion. This is based on the fact that BP, Transocean and Cameron have suffered market cap reductions of $25 billion, $5 billion and $1 billion respectively.
To put this in perspective, the Exxon Valdez disaster in Prince William Sound, Alaska, which, in 1989 resulted in 250,000 barrels being spilled, led to a jury award (in Baker v. Exxon) of $287 million actual damages + $5 billion punitive damages. The Deepwater Horizon disaster would have to continue, at a rate of 5,000 barrels per day (the current official estimate), for nearly two months to yield the same oil spillage as the Exxon Valdez, and the market would still be pricing a loss equal to 6x the Exxon Valdez.