Transocean LTD (RIG) is a Switzerland based oil drilling company. They owned the oil rig that exploded in the Gulf of Mexico under the control of British Petroleum (BP). Unfortunately for Transocean, the explosion caused a plague of bad publicity and hefty legal fees. These costs have been present on the company’s financial statements causing total profit margin to decrease severally. With a cease in offshore oil drilling in the Gulf of Mexico, a few of Transocean’s rigs were no longer in operation. This essentially affected total revenue. Taking a further look into the company, one can see, despite the disaster, they are still an industry leader. Pre-explosion, Transocean was steadily valued at $90/per stock range, after news of the oil spill, stocks plunged to $41.88 in June. Since the company hit rock bottom, stock prices have risen steadily towards the pre-disaster stock price. I believe the trend will continue and even possibly surpass the company’s previous price highs. Several factors that will lead to the continued growth of this company are as follows; as legal matters with the BP disaster wind down, the company can focus more on business operations with fewer distractions. This has already begun to occur; the company has purchased new rigs that boast technological advancements in safety and ease of drilling. The Rig cost $195 million and is scheduled to finish construction in one year. With future expectations of greater total revenue, increased oil drilling demand, and increased profit margin, this company is quite attractive for our team, Yo Investments. Although there can be a further hit on the stock in the short-run, I believe that the company can hit towards same price (pre-explosion) in the long-run. The graph above illustrates this company is on the right track.
I thought that this was a very interesting post. It doesn't surprise me that shares plummeted to $41.88 so quickly. I find it interesting to be able to track the steady growth of the stock price of Transocean after the oil crisis.
ReplyDeleteI would like to pose a question: Does anybody think that investors overreacted in this case? Do investors overreact to all news? Or is that what is expected of them? Is this what they are supposed to do?
I completely understand that this was one of the worst oil spill disasters that ever occurred, but Transocean is not a poor stock choice based on its history. At one point in 2008, Transocean was valued at approximately $156. I do not think that Transocean's stock price will reach $156 by the end of the competition, but I would expect that it continues to rebound from their crisis.
The bottom line is that it depends on how one analyzes the situation at hand.
Arguably, investors did not over react in selling BP and/or other related energy names. Fund managers were reducing their exposure to the energy space because it was the most hated sector and managers did not want to explain to Board members why such an investment made sense (in the midst of the spill). Couple that with the uncertainty - an unknown amount of lawsuits being filed down the road/undefined cost, an energy trading desk that might not have been able to obtain capital, new leadership at BP, the potential for government intervention, the list goes on - then such a correction was warranted. To add, it is the institutions that move stock prices. A portfolio manager might have had only 1-2% of his/her portfolio in BP or Transocean, so cashing out would not necessarily be that investor overreacting, but if hundreds of money managers cashed out, and that 1-2% meant thousands and thousands of shares being sold, which was the case... well as a result, the stock suffered.
ReplyDeleteJust today, the U.S. Justice Department filed its first civil lawsuit against BP and other companies involved with the matter. The link is (http://online.wsj.com/article/SB10001424052748704828104576021762008860814.html?mod=wsjcrmain). I would definitely recommend reading this article. This is what many investors months ago were afraid of. However, BP is selling assets to cover the associated cost. Many investors may view this as a plus thus making them want to own the stock again, not to mention the potential of a special dividend. Also, interest rates are so low so one can ask if BP can easily tap the debt markets and raise money to fund deeper costs associated to the spill (they might have already done so).
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ReplyDeleteI agree with Mr. Walker. We (as a team) need to check out the new lawsuit and how it might affect RIG (the stock). I was listening the radio on the way home, and it was mentioning the lawsuit multiple times within a hour.
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