Owner of Sunken Oil Platform Had Safety Concerns

May 6, 2010

Transocean Ltd., which owned the drilling rig that exploded and sank in the Gulf of Mexico, eliminated bonuses for top executives last year over concerns about safety problems at the company.

The company said in a regulatory filing on April 1 that it eliminated the bonuses to stress safety after four workers died on rigs last year. It wanted to give executives more incentive “to promote … the avoidance of future fatal accidents.”

On April 20, the company’s Deepwater Horizon rig, which it leased to BP PLC, blew up and sank. Eleven workers were killed and the accident spawned a huge oil spill that is now endangering wildlife and businesses along the Gulf’s coastline.

Transocean’s chairman and CEO told shareholders in a letter in March of a “thorough review” of safety practices taking place across the company.

Lawsuits are starting to pile up. Some survivors of the Deepwater Horizon claimed in a lawsuit Tuesday that they were stranded in a rescue boat for more than 10 hours after the explosion, watching the rig burn and knowing that other men were missing.

Transocean spokesman Guy Cantwell defended the company’s response to the April 20 explosion 50 miles (80 kilometers) off the Louisiana coast.

“One-hundred and fifteen people got off this rig alive,” Cantwell said.

Cantwell said management recommended the decision not to pay executive bonuses last year. He said the four deaths in 2009 occurred on different rigs in four different countries. Reports on one death, in Azerbaijan, appeared in the media, but Cantwell declined to disclose other locations and whether any were in U.S. waters. None were related to drilling, he said.

The company had two workers killed in 2008 and none in 2007, Cantwell said.

Philip H. Weiss, an analyst with Argus Research Group, said Transocean has a strong backlog of rig contracts and was benefiting from a tight supply of rigs capable of operating in deep water.

“They have been doing well, but this (blowout) creates a huge overhang,” Weiss said. He said uncertainty about Transocean’s potential liability after the explosion makes it hard to recommend the stock, which he downgraded to “hold” on April 30.

Weiss said he wants executives to discuss the potential fallout on Thursday’s call but fears they won’t because of legal concerns.

According to a lawsuit filed in Texas state court on May 4, a supervisor rushed to get crews on life rafts but the workers were then kept on a boat near the burning rig for more than 10 hours before being taken ashore. Kurt B. Arnold, the lawyer who filed the case, said company officials tried to get statements from the crew members before letting them leave a hotel in Kenner, Louisiana, the next day

The lawsuit was filed on behalf of one of the 11 killed on the Deepwater Horizon and three survivors and alleges the rig wasn’t seaworthy and didn’t meet federal safety standards.

The family of another dead worker filed a lawsuit in federal district court in Louisiana shortly after the explosion, charging Transocean and BP with negligence.

Several other lawsuits have been filed against the companies on behalf of fishermen and others who expect to be harmed by the spill, and the governor of Florida is considering suing.

Fitch Ratings on Tuesday changed its outlook on Transocean debt to “stable” from “positive,” citing the potential for large legal expenses and liabilities related to the oil spill.

Fitch said Transocean carries $950 million in liability coverage before deductibles, and oil companies usually repay rig owners for costs related to blowouts. But the rating agency said Transocean could still be vulnerable for damages above $950 million if was found to be negligent.

Insurance should cover the loss of the $560 million Deepwater Horizon, which sank in about 5,000 feet of water, but Transocean has a deductible of $10 million per event on personal injury liability, Fitch said.

The agency kept its rating on Transocean debt at “BBB,” or investment-grade but carrying a moderate default risk.

Transocean’s annual shareholder meeting is planned for next week in Switzerland.

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