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Buy Transocean While the Lynch Mob is Baying for Blood
You know my preference for buying country funds when there is blood in the streets. The corporate equivalent of that maxim has to be to buy when a lynch mob is about to hang them from the lamp post.
That certainly is the case with Transocean (RIG), which is catching all the blame for the Gulf oil spill (click here for their site at http://www.deepwater.com/fw/main/Home-1.html ). But a few energy hedge fund managers I know have been going through the company’s contract with British Petroleum (BP) with a fine tooth comb, and it turns out that the latter agreed to indemnify RIG for any accidents, including spills. Unless BP can prove deliberate fraud or negligence, the cost of the entire disaster is going to come out of its pocket.
I know the management of RIG fairly well, as I once negotiated to participate as a partner in another offshore project. In the end, I didn’t go ahead because the $10 million minimum bite was more than I was willing to lay out. And guess what? These things can blow up! But you’ll never find a finer and more professional team in the oil patch.
The company has a net asset value of $106/ share, which makes its current price of $51 a once in a life time steal. It has a $28 billion order backlog to tap offshore fields in places like the offshore Tupi field in Brazil, outside the reach of federal regulators, which will generate $10 billion of free cash flow over the next three years. The massive Tupi is thought to have 5-8 billion barrels of oil in deep water.
Buy at first news of a successful capping of the underwater well. How will you know when this is happening? Just clink here for the link at http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/homepage/STAGING/local_assets/bp_homepage/html/rov_stream.html for live video taken by BP’s remotely operated video at 5,000 feet down in the Gulf. Don’t ya just love the Internet?
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on the “Today’s Radio Show” menu tab on the left on my home page.
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XOM H&S in motion initial target ~$43. BP marking out its own H&S .. target ZERO. At current rate of sink RIG will be below its DEC08 low within days. After a brief hiatus CAM resumed its kamikaze dive & will exceed its MAR09 low in due course. ATPG is -62% from mid April after an 18% drop yesterday. ATPG's MAR09 low was 3.25 with only JUL09 support to save it. APC -19% yesterday, HAL keeping them all company. Bottom is who knows where but wherever it is what wonderful buys. Another month or two of this & we'll be in same territory as with PM miners in 08.
Once things settle down take a look at NALCO, makers of COREXIT dispersant & BRIGHTWATER EOR, backers are Buffet, GS & Apollo et al.
But you’ll never find a finer and more professional team in the oil patch.
Thank you for so eloquent making the case that there should not be an oil patch run by the clowns at Transocean or any other firm in the patch presently. Deliberate indifference is just that. Contract law (however poorly enforced and respected by authorities or companies themselves) does not absolve one from criminal liability, especially when gross negligence is involved.
Thanks for being clear that you dated and wanted to marry the firm, but the price tag held you back madhedgefundtrader. Infatuation does cloud reason as you should well know. In this vein I'll pass along a recent gem from the IRA that applies to this situation as well.
Rather than making us all go through a pointless and ultimately futile exercise of trying to "mark to market" assets for which there is no live market, we should be focusing attention on reforming our financial markets so that transparency and public market pricing is built into the system. Then the existing rules will be just fine, thank you.
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
If Transocean and the other firms that make up corporate life would actually enforce the law of the street and refuse to do business with others that had little or no respect for contract law or for proper governance and management control then many of the issues that concern you mad-one would cease to be concerns since government would follow the lead of corporate America like the lost little puppy it is.
I disagree that RIG is a buy right now. I agree with QEsucks that a drilling moratorium will be coming and oil companies will be able to break contracts with RIG.
But I think RIG will be found to be not at fault for this disaster. Just based on the limited information in the press, this problem seems to have started from natural gas escaping from the inside of the drill pipe which burned down the rig. I think this will point to human error on the part of BP. BP is blaming RIG for the blowout preventers that didn't work, but the I think the rig was on fire before the blowout preventers were activated. The BP engineers should have, but didn't, notice that gas was coming up the drill pipe. When you take a well control class, this is one of the things that is stressed the most. I suspect the gas wasn't noticed because they were having a safety award cerimony at the time. So I think BP will be found to be completely at fault.
I disagree that the technology is insufficient for drilling this deep. BP, Exxon, Chevron, and Shell have been drilling these deep, sub-salt wells since the mid '90's. They have drilled hundreds of these wells. The simple mistake that was made could have been made on a shallow well.
BP is horribly unprepared for the aftermath of the problem. It seems that no thought was given to the process of getting a blowout under control. The domes that they just built should have been built ahead of time and they should have been tested. Other procedures should have been worked out ahead of time.
CEO of the Sofa
Writing from the Sultinate of Oman
I've reduced my risk with RIG holdings, but still don't dismiss it. Anyone here should know not to be suprised at the ties between govt, banks and OIL.
As for RIG's responsibility, think of them as tractor rentals. If you want to dig up the street, rent a tractor and puncture a natural gas line. It's your fault baby, not Caterpillar or the rental.
"Big Oil" might own a few state & local govts, but they aren't bright or connected enough to own more than a few congress critters at the national level. The bankers, on the other hand, own the national government. This is why Big Oil is going to wander in the desert for years (and offshore drilling is dead until President Palin rules with a two house majority), while the bankers thrive.
Have you noticed that where lawyers used to run the national government, the top posts are increasingly being filled with bankers?
how do you think this event will affect demand for their rigs since offshore drilling is now finished in the US - forever - and likely elsewhere and do you think the stale book price value is accurate in light of this event?
also do you think RIG has indemnity from the political liability they are creating for Obama?
also as someone who knows RIG mgmt do you have a conflict of interest here?
As usual, great thoughts here. Against the fundamentals, the political climate and the "environ-Mental clan" wield swords that can effect further price deterioration. In the background, something tells me that "they" need oil prices higher to continue the subsidy theft that is on going, for alternative energy - what this really means is that private investors with speed dial to TPTB, forsee greater opportunity to make more money. Watch the additional costly regulation to delay all drilling (maybe 3$ a barrel for the save-the-world-next-time-this-happens fund.
In a semi-perfect world, I would agree with buying RIG at a slightly lower price...but with the type of MF's out there manipulating the media & public opinion, I don't see potential to profit here.
To me MHFT sounds like a desperate and offside long caught in the crosshairs of a stock in freefall. So desperate he has to put out a post full of disinformation in a futile attempt to persuade some neophytes to buy the stock. No thanks ! Both BP and Transocean will be found criminally negligent becuase the public will settle for nothing less. No supposedly iron clad contract will save them. This stock will be at $40 in a hurry.
the mainstream are just sobering up from the holiday to see this carnage... 2 months to follow with another gamble...
these stocks might end up as bad as the bank stocks during their nadir.. pick RIG up at $3
MadHedge must be trying to help out his boys as they sell some of their weight off
Agree
MHFT seems to be buoying his portfolio.
I work in the industry. RIG, BP and Cameron are lepers right now. I wouldn't touch them with a 10ft pole.
Difficult to quantify ultimate financial liability so all bets are off. However, from a fundamental investing perspective, Transocean's business is likely to grow bigger and more profitable. We need oil and the moratorium on drilling will be lifted, but with more regulation. The most likely safety procedure to be implemented will be simultaneous drilling of relief wells, thus increased demand for RIG's rigs. Higher lease rates and lower vacancy. The costs passed through Big Oil to the consumer. Short term, if the emotion about liability exposure wanes with some good news on the latest "top cap" attempt there may be a significant bounce. Longer term, the fundamentals are solid but you need to overlook the legal overhang as anyone who has invested in tobacco is aware. And trust that our dysfunctional legal system will grind the little guy down over time.
sleep with dogs and you'll wake up itchy in the morning.
there isn't enough blood on the streets yet to purchase RIG just yet.
Book value, schmook value. The provisions for pending litigation will take out a good deal of the book value, and the political risks to the industry and perhaps even RIG will knock the multipliers down a few notches.
Instrinsic value is almost Quixotic these days ... the markets are telling you somthing.
Thanks for reminding me about the real intentions of our overlords.
I did buy RIG at 50.00 in the aftermarket before I saw this MHFT post. I figured that it is good for a bounce of sorts but the impossibility of accounting for gombit actions scares me. At one time I thought that the goomints wouldn't wipe me out for no good reason as I have employees and pay a shitload of taxes to them. I now know that the goomint types don't care at all about my productive value to them. They will squash me for the laugh.
Tapeworm:
it's not about the laugh. it's about the eggs to make the omelette. we are all collateral damage.......................................
Mmm..nahhh...just send me the check
And do we think that this particular well is the only one where corners have been cut?
Just one roach, right?
When the "Lynch Mob" goes out for blood they get it. If everyone is short there is not bottom until they go out of business.
Another garbage post by MHFT. Glad I'm not one of your clients. No common sense whatsoever.
This site is getting more and more creepy.
This site should have full disclosure when pumpers and dumpers have free reign to whore their merchandise. Whats your position and when did you acquire it ? It just helps to disclose if you want to be taken more seriously than the mooks on MSM like Cramer and Co.
Was hearing a guy on tv tonight mentionning all those big companies that disappeared following this type of extreme events, think Union Carbide, think Arthur Andersen....with so much uncertainty I do believe it's way too early to dip into the name.
The more I see these sad images of Louisiana shores the more I think about the "drill baby drill" girl....what a shame
Yes, Gov. Palin has been pretty quite, huh?
Actually, no. She's as big a TWIT(terer) as ever...funny how those "drill, baby, drill" types are all over government intervention when it's their cronies asses in the sling despite all their "small government" rhetoric on the (losing) campaign trail.
Perhaps she should take her kids down to the beach and clean some birds in atonement.
Why?......this is BY far not the worst spill/leak ever.
And we have NO choice but to continue to drill..........what's STUPID is why are we not drilling on land, where it's FAR less likely to cause issue's?.................Eco Nazi's, that's why.
There's only been 2 Major leaks/incedents of this nature in 20 yrs......thousands of rigs.
IRAQ dumped 500,000 million gallons of crude in the Gulf War.......not counting what was set afire.
Nigeria, LEAKS more than has been leaked yearly, than BP's accident..............(were we get 40% of our crude).
While this is a disaster, it's not the End Of the Earth, nor the Oceans.....folks along the coast, and jobs will be hit hardest.
Last I heard, Jindal IS STILL waiting for Boom.............
And Bush was responsible for Katrina?.
Got a feeling BP will be a non entity after Obama get's thru w/them, and what about lawsuits?.
Me, I would think twice.
Here in the UK, stories are starting to appear in the newspapers taking the line that 'What's bad for BP is bad for the UK.' The impression is that because BP is British, they are getting treated far worse than a US firm would.
BP pays £1 out of every £7 of dividends paid by FTSE 100 companies. UK pension funds are heavily invested in BP and the company also pays a huge amount of tax in the UK.
I don't imagine the UK government is going to stand by while Obama destroys our biggest company. Deals will be done that allow them to survive. 'How could we afford to support you in Afganistan without the billions in tax we get from BP' etc..
monkey,
Appreciate your support brother..............however you assume BHO thinks LOGICALLY.It's all smoke and Mirrors..............
I know, BP paid out more to HIM,than any other member of ALL Congress.
He is a fascist,his cabinets/advisors, are nearly ALL Marxist's/Socialist's/Fascist's/Terrorists,...............he has an agenda, and it's not Socialism.
I don't see any technical cause for the blowout related to deep water, just mismanagement. There may be technical reasons preventing a quick cure due to deep water. I expect there will be a technical adjustment for future projects to establish an addition defensive line for blowouts. Drilling will continue world wide, if not the USA.
A greater risk to RIG's valuation is a 90% total drop to the S&P 500 from the on going credit crisis. Pick your entry carefully.
Slide into your time machine and go back to March 24, 1089 when the Valdez had just run aground in Prince William Sound. Had there been an Internet, the posts would have read the same: discussions of deliberate fraud and negligence, hold harmless, monkeys on their backs for years, lynch mobs, punitive damages, public policy, federal fines, moratorium…. And there would have been a few (self-serving) contrarian posts such as this one. But it’s just not that hard, folks.
In between the pain and prayers for the victims are opportunities. It was true after the Valdez, 9/11, etc. 21 years later, pockets full of dividend payments, and after several 2:1 splits, anyone who has been in the stock over an extended period of time plans on taking it to the grave (including my wife).
The point here is not to draw a perfect parallel but simple to say that it doesn’t take a website full of research to suggest that RIG is a screaming LONG TERM buy. Stick a couple hundred shares in your lock box, expect short-term volatility, quit reading (and writing) about it, and let us know how it worked out in 20 years.
P.S. BP is a whole other story. I’M not even that crazy.
Looks like the ROV is surfacing.
There are so many uncertain things around this. We don't know how much more oil will come out. We don't know how our beloved congress will react to the situation. Judging by the finreg bill, there won't be much. but you never really know. finally, you won't know how other governments react to the event. they may ban all the off-shore drilling. then you may catch a falling ax, not a knife.
good luck
According to the article, it would appear that the hold harmless and indemnification clause is void if the negligence is willful and wanton. Pretty standard stuff, actually. At least that is what I glean from the words "deliberate fraud or negligence". From what I understand about this whole incident that may be the case. Couple that with the punitive damage potential which is against public policy for a company to be reimbursed by another, and Transocean has extreme exposure.
BP has given up capping the leak - will wait for new wells in August to resolve this. This is going to get real ugly. Better set those buys a bit lower.
Beyond the disaster the current administration sees this as a golden opportunity to confiscate revenue to help make up for their inadequacies in other areas.
So the parties involved in the Deepwater project will have a monkey on their backs for years to come.
Nah they'll do what Halliburton was smart enough to do. Move out of the US. They can still make their company going forward without the US. Specifically the 2 large deep fields off of Brazil. And they already partner with Petrobras.
"Unless BP can prove deliberate fraud or negligence, the cost of the entire disaster is going to come out of its pocket."
Ooph. You know, there are just too many people on this rig who are claiming just that.
I'll pass.
Buy Transocean While the Lynch Mob is Baying for Blood-
I would wait to see how much blood the lynch mob actually gets before I would go near a company with any possible liability in this fiasco.
+1
i wouldnt put it past hussein to "shut these firms down" in the name of safety and all
You are going to get your arse handed to you on this one.
Two words for you: Punitive Damages
There is no indemnification for punitive damages or fines...it is against public policy.
As a captcha, why not ask, what is the current liability for federal fines on this spill? Try $1,000 per barrel that escapes into the gulf.
The answer? A bigger number than RIG's net worth.
Buy this one at your own risk.
And if the federal government doesn't get them, Louisiana will. You have to remember something: Louisiana has it's own version of contract law based on the Napoleanic Codes. It's the only one of the 50 states that uses it. When we were in law school the first thing we were told to do if our clients were sued in Louisiana's courts was "Settle".
Richjoy 403 in response to an article by Mark Riddix at Seeking Alpha wrote:Global E, the following is a copy of most of another of my recent posts (regarding SLB), you are welcome to any of it that may be helpful...if the post seems too long, just go to numbers three and four:
First, ignore 100% of the politicians and all the statements from BP (which seems only apply unlikely fixes while actually buying time for the drilling of the relief wells)...the truth to focus on is that deep water drilling has a critical core problem--the technology to drill into the ocean floor at extreme pressures caused by a mile depth of water has outdistanced the technology to deal with failures on the ocean floor...and more failures are certain to occur with scheduled future drilling around the world (consider for example the even deeper drilling off Brazil). Failures can have 1,000 causes, but can be categorized as human error, mechanical failure, or acts of God.
Consider this telling fact to support the thesis that they do not have the technology to stop the leak--BP had to ask their competitors for "ideas" on how to stop this spill.
Second, a moratorium on deep water drilling is appropriate and required. Frankly, since disaster this was certain to happen at some point, the timing is fortunate in that the impact of this moratorium on present world oil supply is minimal, especially given both reduced economic activity and that deep water drilling is still in its infancy with few producing deep water rigs.
Third, this moratorium will have a significant impact on the oil service industry as deep water rigs require a lot of expensive high-margin equipment and services--the moratorium will reduce revenues and will greatly reduce profits, and (worse) will produce uncertainty as to when "normal" activities and profits will resume (we know markets hate uncertainty). Though the moratorium is said to be for 6 months, there is no certainty it can be removed in 6 months, as the drilling industry must first develop and test new equipment and repair procedures to the satisfaction of newly strengthened and vigilant regulators (which will be anxious to prove themselves worthy of the term "regulator"). A moratorium of 9 to 12 months (or more) is my more realistic assumption.
Forth, in the meantime, the stocks of deep water drillers and service companies, will fall, and will fall further as it becomes evident the moratorium will be longer. The day-rate leases of some rigs will expire, causing falling rates/profits for RIG and others. New blowout preventers must be developed and tested to the satisfaction of regulators. Some rigs may require expensive and time-consuming retro-fitting to accommodate the new equipment and new regs. Remember that this giant rig sunk with the loss of 11 lives--the regulators will want to know why...was the sinking the direct result of the explosion, or for another reason?...and what new or altered equipment can prevent future explosions and sinkings? Time, $, and training will be required. New laws will be written and liabilities and cost of compliance will be expanded.
Fifth, there may be some offsets to the loss of revenue, as there may be more business for the shallow, mid-depth, and even land-based drillers. SLB should gain some new business; however, given SLB's size and overhead, I do not expect SLB to take a larger share of this market in the short term.
Sixth, regarding SLB's stock price: I expect to see declining SLB quarterly earnings soon, and depending upon the length of the moratorium, SLB stock to fall into the $52-$42 range. The good news should be that SLB is large enough and strong enough that they may be in a more favorable position coming out of this moratorium than their smaller competitors--thus their long range potential will be even greater from the nadir. I'll start buying into SLB again in the mid $50s and hope it doesn't fall past the high 40s.
I copied and posted with attribution to author above specifically re: item #4 and #6. I'm not certain RIG is a screaming buy. Yet. I will keep my last kidney for a better entry point.
+1
Good idea but I have found that falling knives must be caught with great care.
The market is the market is the market. This might be the very bottom (or it might not.)
RIG has been on my buy list for sometime, but it still doesn't have a margin of safety built into the price. The litigation that is coming will weigh on the stock for some time and there is considerable downside risk, depending on outcome of that litigation. Even at this price, RIG is still more of a bet, than an investment. I see more downside from the spill, not to mention the macro events shaping the markets. As economies scale back, oil prices will inevitably drop no matter how vigorously speculators prop them up in the short term. However, if Bernanke begins raising interest rates, oil will respond positively, and I would begin building a position in this price range.
Good luck with this one. It is just like politics. You vote for scum, scum runs the country. If you give your dollars to an organization involved with flooding the Gulf of Mexico with crude--well, put on your seat belt! LOL! Get ready to lighten up!!!
At least for the near term it would seem. Wasn't it just last year that BP was working on their new image of "hippies swaying around the campfire, can't we all just get along, we are a green company" with all the happy-smiley ads every ten minutes on the tube. May be a while before they run those ads again. A lot of those green types may not be pulling into a BP station to fill their hybreds and soccer SUVs.
More conservative might be to look at buying the other drillers that have been pulled down in sympathy, but have nothing to do with this mess: Diamond, Noble, etc.
"The rubber annulus was damaged"
That just sounds so, so wrong.
"The company has a net asset value of $106/ share"
LOL. Did you come up with that number before or after the words "moratorium" and "regulation" became the new buzzwords of the entire industry? Assets rise and decline in value based on utilization and relative scarcity (or lack thereof).