The tragic 2010 oil spill in the Gulf of Mexico is now more than three years in the past. However, lingering effects still exist and are serving as anchors on the performance of the companies involved in the incident.
That’s why it’s so important to put BP plc (ADR) (NYSE:BP) and Transocean LTD (NYSE:RIG) under the spotlight, to determine whether there’s more pain in store for investors.
A difficult three years
To say that BP plc (ADR) (NYSE:BP) and Transocean have paid dearly for the mistakes made surrounding the 2010 Gulf spill would be an understatement.
In particular, BP plc (ADR) (NYSE:BP) continues to set aside huge sums of money to cover continuing claims, and is now trying to claw back some of what it has paid. The company objects to a great deal of the claims coming in, with Chief Executive Officer Robert Dudley stating his intent to aggressively fight what he termed ‘false and fictitious claims’.
Indeed, there’s reason for BP plc (ADR) (NYSE:BP) to worry. Under a 2012 settlement to compensate businesses that incurred damage from the spill, BP originally estimated that the cost would be $7.8 billion. Then, after releasing poor second-quarter results, which saw adjusted profit fall 25% year over year, BP advised investors that the settlement would cost closer to $9.6 billion, and that the final total would be even higher.
All told, BP plc (ADR) (NYSE:BP) has shelled out $42.4 billion, as of the end of its second quarter, due to the Gulf spill. And, more damage is in store, since BP still faces the prospect of forking over billions more once its civil trial has concluded.
Transocean back in action
Meanwhile, the situation is drastically different for Transocean LTD (NYSE:RIG), the owner of the rig that exploded. Transocean pleaded guilty to violating the Clean Water Act and was forced to pay $400 million, in addition to other penalties, earlier this year.
However, Transocean LTD (NYSE:RIG) has more than enough financial ability to recover, as its underlying business has gotten back on track. Revenue is up 3.5% over the first half of the year, and the company booked more than $1 billion in operating profit over the first six months alone.
Furthermore, the company has taken advantage of the global uptick in offshore drilling, and is well-positioned going forward. Transocean LTD (NYSE:RIG) has an immense $27.3 billion contract order backlog, and is in the process of expanding its fleet to meet the increase in demand for deep-water drilling. Since July 17 alone, Transocean has secured $2.5 billion of total value of new contracts.
At the same time, the stock price has languished, unable to meaningfully breach $50 per share since the spill. From a valuation perspective, Transocean LTD (NYSE:RIG) now trades for 11 times its 2012 adjusted EPS.