Monday, September 13, 2010

FBR on Transocean (NYSE:RIG), BP (NYSE:BP) Indemnity Battle

With the stock of Transocean (NYSE:RIG) discounting $6 to $7 billion in relationship to potential liabilities in the BP oil spill, FBR Capital said it's probably going to be far lower than that.

FBR stated, "The primary conclusions from our recent series of meetings with legal experts in the Gulf Coast are that Transocean's legal liability is likely to be far lower than the $6 billion to $7 billion presently discounted in the stock, but that the issues are incredibly complex. Transocean seems to be protected both by the law and by its contract with BP from bearing substantial liability for the spill. Under OPA, Transocean is not a responsible party for pollution emanating from the well."

Even so, the contract between BP and Transocean may not protect them, as there have been court cases in the past where indemnification has been disallowed. If BP chose to, they could attempt to legally penetrate Transocean’s indemnity.

The question is whether the financial incentive is worthwhile taking the action.

FBR concluded: "However, we do not believe that BP has enough financial incentive to pursue Transocean for contribution claiming gross negligence as this could open BP up to an additional $16 billion in fines under the Clean Water Act (CWA). With Transocean having a book value of $21 billion and a market capitalization of $18 billion, it could hand over the keys to BP and it would not offset the financial risk to BP that it might be found to be grossly negligent under the CWA."

In other words, it's highly unlikely BP and Transocean will ever go to court over this.

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