Transocean Stock (RIG:NYSE)

Brian Hicks

Written By Brian Hicks

Posted August 11, 2010

I married an attorney. I know damn well to review everything in a contract… everything.

I don’t care if it’s 200 pages long. My wife is on me like white on rice to review everything – well, before she reviews it a second time to see what I missed. (Ain’t marriage grand?)

So when I heard that there was a broad indemnity in Transocean’s agreement with BP, I went searching.

Sure, I knew BP countered Transocean, saying that Transocean would not be indemnified if it was found to be grossly negligent. But the contractual language used in Article 25.1 says different.

Here’s what it says word for word:

Except to the extent any such obligation is specifically limited to certain causes elsewhere in this contract, the parties intend and agree that the phrase “shall protect, release, defend, indemnify, and hold harmless the indemnified party or parties from and against any and all claims, demands, causes of action, damages, costs, expenses (including reasonable attorneys fees), judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including preexisting conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels (including the drilling unit), breach of representation or warranty, expressed or implied, breach of contract, strict liability, tort, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross or any other theory of legal liability and without regard to whether the claim against the indemnitee is the result of an indemnification agreement with a third party.”

Notice the “without limit and without regard to the cause or causes” line. That line is why RIG should be safe.

BP can say it’s not obligated to indemnify Transocean. But in the end – and I’m no attorney – BP could have a heck of a time protecting itself from the contractual indemnifications, other than from suits brought on by the families of the 11 that died.

That could mean Transocean is in the clear.

And it looks like Wall Street agrees.

Not only did FBR reiterate its Outperform rating with a $70 price target, noting:

We continue to believe that Transocean is oversold, as we estimate the company’s ultimate liability will be far lower than the $6 billion currently priced into the stock. While we are reducing our EPS estimates, due to lower deepwater day rate forecasts, we reiterate our rating and price target since we believe investors will gain increased confidence that the shares are pricing in too much liability risk, particularly given Transocean’s seemingly ironclad indemnification clauses.

Buyers sent the stock up more than $10 last week alone (and handed Options Trading Pit readers a fat 180% gain in mere days).

Better yet, the deepwater moratorium could be lifted earlier than November 30, 2010… if oil companies can show improvement in spill containment and response plans. That alone could rocket shares of RIG.

So, what’s not to love here?

Buy more Transocean (NYSE:RIG)… and hold long-term. This is an $80 stock masquerading under $60.

Stay Ahead of the Curve,

Ian L. Cooper
Energy and Capital

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