Transocean (NYSE: RIG) agreed Jan. 3 to a $1.4 billion settlement for its role in the Macondo blowout, raising questions about whether the company will restart its $1 billion dividend.
Even after paying the Department of Justice (DOJ), the company will likely have money for shareholders and another $2 billion in the bank, said Scott Gruber, senior research analyst, U.S. oil services and equipment, for Sanford C. Bernstein & Co.
The settlement evaporates the cloud hanging over Transocean’s stock, said Gruber, adding that investors should now be able to focus on the company’s operational improvement and fleet restructuring.
“In this heightened era or risk aversion, the stock becomes investable again for many,” Gruber said, though he noted Transocean still faces legal hurdles
The settlement may also signify that Halliburton (NYSE: HAL) will find favorable terms if it is able to reach an agreement with the government. BP had hired Halliburton and Transocean as contractors on the Deepwater Horizon project.
As part of the settlement, a Transocean subsidiary pleaded guilty to a misdemeanor violation of the Clean Water Act (CWA) for negligent discharge of oil into the Gulf of Mexico.
Transocean previously reserved a $2 billion charge for Macondo liabilities, including $1.5 billion for claims made by the government. Still unresolved is BP's attempt to settle with Transocean over compensatory claims and payments to survivors of the 11 men killed and those injured.
Gruber forecasts that Transocean will end 2012 with $4.8 billion in cash and generate $3 billion in operating cash flow in 2013. The company plans $3 billion in capital expenditures and $1 billion in debt repayment. It will also make a $560 million installment payment for the DOJ settlement, which is to be paid from 2013 to 2017.
Transocean said in February it would not propose a dividend. In 2011, it paid $3.16 per share.
“We await further guidance from management on their willingness to restart the dividend given that the majority, but not all, of potential Macondo liabilities have been settled,” Gruber said.
The deal between Transocean and the government could bode well for Halliburton, Gruber said. With the Justice Department now focused on Halliburton, the likelihood of a settlement in the near-term increases, he said.
Halliburton may be able make an “even more manageable settlement” if the company takes Transocean’s route, he said.
Gruber rates both companies “Outperform,” with target prices for RIG at $66 and HAL at $40. Transocean was up more about 6.5% Jan. 3 to about $49.
In September, Gruber said Transocean has the greatest leverage to the offshore drilling cycle coupled with several potential catalysts and a heavily discounted valuation.
On Dec. 17, the company announced updates to several contracts, including a three-well contract for offshore Indonesia at a dayrate of $500,000, with a $90 million contract backlog.
