Market Doesn’t Show Much Faith in Transocean (NYSE: RIG) Court Filing

Gavel Last Thursday, Transocean Ltd. RIG, who owned and operated the Deepwater Horizon drilling rig, filed a petition requesting to limit their legal liability to $27 million. Basically, the rig is considered a maritime vessel and this goes back to the Limitation of Liability Act of 1851, which states that the owner is only held liable for the value of the vessel post accident (while worth $650 million before the accident, it will be worth much less at the bottom of the ocean). Transocean wants to consolidate all of this in federal court, rather than face presumably irate local juries.

I am no legal expert, but the stock was down again on Friday and dropped on Monday as well. RIG has lost in the ballpark of $10 billion in market cap. Seems unlikely that they are going to get off paying just $27 million.

One key feature of the 160-year-old act is that it only applies when there are no signs of negligence. Considering some of the things that came out of Congressional hearings around faulty safety equipment, that does not seem to be a sure thing.

If any of you out there think that RIG has a solid case to really limit liability, you might consider buying out-of-the-money calls. The market is telling us with its drubbing of the stock that there will be huge bills for the company. The stock is currently trading $64.99, and it was trading above $90 before this. The problem with that strategy is figuring out the time frame for buying the options. Unlike stock, options expire, and there is a good chance that this will play out over years, not months. That makes selecting a proper option harder to do. Remember, the risk to buying a call is 100% of the premium paid.

For those who think RIG may not have a good case here and expect the stock to decline even further than it already has could sell bear call spreads. The maximum potential gain for a bear call spread is the credit collected when the trade is executed; the maximum potential loss is the difference in strike prices minus this credit.

Photo Credit: mrbill

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