Shares of Transocean (RIG) advanced more than 8.5% on Thursday after the company maintained that its contract with BP (BP) protects it from liabilities associated with the April 20 oil rig explosion in the Gulf of Mexico.
Transocean shares climbed to $58.24 up $4.60 or 8.74% in afternoon trading as investors were convinced that the company, which owns the rig that exploded and caused the largest oil spill disaster in U.S. history, would most likely avoid major losses related to the destruction of the well. The company included the contract as part of its 10Q quarterly regulatory filing.
Analysts from Morningstar said in a note on Thursday that the contract "spells out in explicit detail BP's contractual responsibility to indemnify Transocean for any loss, expenses, claims, penalties, fines, or other liabilities related to pollution or contamination from hydrocarbon discharges from the well. The indemnification will also cover any costs related to the control of the blowout."
Although BP has thus far refused to honor the contract, Morningstar believes "BP will have great difficulty breaking through the contractual indemnifications in the rig contract." Disclosing the contract removed a great deal of uncertainty about possible legal liabilities related to the oil spill for Transocean, allowing investors to take the risk of buying the stock.
The contract disclosure helped Transocean shake off weaker than expected second quarter earnings, which were down 10.8% over last year.
It also deflected possible negative reaction from Wednesday's news reports that internal reports revealed that Transocean had safety issues at the Deepwater Horizon rig that exploded and three other rigs in the Gulf of Mexico. The New York Times reported that documents from risk management company Lloyd's Register detailed numerous safety and maintenance concerns at Transocean's Houston headquarters and four of its rigs in the Gulf – including the Deepwater Horizon. It is unclear if information from these reports could affect Transocean's legal liability in the Gulf oil spill.
Investing Like Warren Buffett
Learn from one of the world's best investors.View Course »