The Brazilian Oil Spill: Overreaction Creates Great Long Opportunity

| About: Transocean Ltd. (RIG)
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The BP (BP) spill has sure put traders and investors on edge. While a number of leaking rigs, fires, and other events, have occurred since the fateful spill two years ago, the spill off the coast of Brazil is an actual event that has moved the markets. The fact that Transocean (RIG) was again party to a spill that involves a large governmental lawsuit right at the time it seems near a settlement with BP seems to have spooked traders and investors as well.

Let's look at the share price reaction in Transocean's shares since the news was announced shortly after shares reached their one-year high, following the announcement that Transocean's deepest water rigs had secured a new and impressive $714,000 a day rate.

The significant pullback has occurred, despite the strong underperformance of Transocean and most oil service stocks in general compared to the S&P 500 and its tracking exchange traded fund SPY.

Transocean's shares have dropped nearly 20% during the recent market sell-off, correction in the price of oil, and the recent news stemming from the Brazilian spill where it was operating a rig for Chevron (CVX).

I think this sets up an opportunity. The Brazilian oil spill has been hard to track since there aren't any real pictures or eyewitnesses accounts, and the headlines have been very negative. Right after the spill Chevron employees were banned from leaving the country, significant lawsuits by the workers on the rig were filed, and talk of suspending drilling in and around the area of the spill increased.

The facts tell a different story. While BP conservatively estimates to have resulted in a leak of 50,000 to as much as 60,000 barrels a day, current estimates for the total barrel spill off the coast of Brazil is around 3,000 barrels. This makes the Brazilian spill less than .1% the size of estimates of the BP spill. Also, unlike the BP spill, no significant environmental damage or commercial loss has yet been reported or expected to occur.

So, where did all these big headlines over multi-billion dollar lawsuits and subpeonas keeping Chevron and Transocean employees from leaving the country come from? It appear a zealous prosecutor evidently wanted to make a statement against the oil industry.

In his efforts to try and make a statement that any and all oil spills will not be tolerated, Eduardo Santos de Oliveira, a federal prosecutor in Brazil, filed criminal charges against the parties involved and even made notable individuals surrender there passports.

Unfortunately, for the anti-oil lobby, this prosecutor was recently transferred off the case. In addition to losing his recent efforts to get an injunction suspending Chevron's drilling efforts in Brazil, the prosecutor, who was pursuing criminal charges against Transocean and Chevron, is now off the case.

So, what does this mean for investors and traders. Transocean has had a tough time the last couple years, but its recently legal victories here and in Brazil suggest its toughest times may be behind. This stock traded up to $58 dollars a share just two weeks ago because of the important and verified story that rates for deepwater rigs had jumped nearly 30%, as oil prices have risen a comparable amount.

To conclude, with Transocean's shares having pulled back nearly 20% on a story that seems likely to be a non-event, the general market pullback, and a 6-7 dollar drop in the per barrel price of oil, longs can enter a company likely to resolve its liabilities here and abroad favorably at a nice price of around 49 dollars a share.

Indeed, companies like Exxon-Mobil (XOM) may have the least risk, but the returns that names like this offer are often limited as well. While stocks like Apple (AAPL) and indexes like the S&P 500 and its tracking exchanged traded funds, have been the strongest performing stocks and sectors so far, today's laggards could become tomorrow's leaders.

With the economic data beginning to turn in China, as I've detailed in my recent articles, and tensions still high in the middle east, Transocean should be well-positioned for a good second-half run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.