Carl Icahn Signals All Clear

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wall Street hates uncertainty. It hangs on a stock price like a palpable weight, sometimes keeping prices down for years. Once the uncertainty is gone, however, a stock can move rapidly. Carl Icahn's big purchase of Transocean (NYSE: RIG) stock, with a disclosed intent to buy more, is a clear sign that he thinks the impact of the Gulf of Mexico disaster is nearing an end. Investors would do well to listen.

Big Overhang
Transocean's Deepwater Horizon rig played a prominent role in one of the largest oil drilling disasters ever witnessed. A massive explosion, massive oil leak, and the loss of human lives marked a drama that played out for months. Although BP (NYSE: BP) was at the heart of the incident, since it was the company for which Transocean was working, there was no way for the provider of the drilling rig to avoid blame.

Both BP and Transocean saw their shares plummet on the event, with shares trading on news and not fundamentals for years. In fact, even after the oil leak was stopped, the legal issues proved to be a lingering issue. Rightly so, since both BP and Transocean were in line for massive legal defense costs and, likely, fines.

This overhang created what many people considered a buying opportunity in one of the largest drill rig owners in the world. Still, few wanted to step into what could be a legal and regulatory morass, so the shares languished.

A Resolution
That overhang was materially reduced when Transocean agreed to plead guilty to violating the Clean Water Act and pay $400 million in criminal fines and $1 billion in civil penalties. The stock reacted positively to the news that a material portion of the uncertainty had been resolved.

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RIG data by YCharts

Interestingly, BP's shares didn't experience a bounce when it settled a material suit in late 2012. This isn't all that surprising, given that the company has had to materially regroup, selling assets and cutting back to keep itself afloat. There have even been rumors that well-heeled competitors like Dow-30 component ExxonMobil (XOM) or Royal Dutch Shell (RDS-B) might step in to buy the company.

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BP data by YCharts

Transocean, while hurt by the disaster, hasn't been impacted nearly as much. It is still a strong company with cutting edge technology and an industry leading position. Thus, the share price bump and the potential opportunity now that the haze is starting to clear.

Icahn Comes Calling
Carl Icahn is a very sophisticated investor with massive resources at his disposal. He didn't wake up one day, read the newspaper and say, “Oh look, lets buy Transocean stock.” He's done material homework that individual investors couldn't hope to match. It's why some investors tag along behind him when he makes big public moves.

In fact, Icahn has recently been behind dust ups at Chesapeake Energy (NYSE: CHK) and CVR Energy (CVI). One of his hallmarks is taking on management teams to push for changes that he believes will increase shareholder wealth.

For example, he pushed for board seats at Chesapeake, with the aim of getting directly into the management process. Having won the control he sought, the company has had no choice but to take Icahn's desires seriously. Watch for continued asset sales, as the company works to shore up its finances.

Transocean may not be the same situation, however, since the company is a leader in its industry. Granted, the last year has seen some notable performance issues (too much rig downtime, for example), but those seem likely to be resolved without input from Icahn. What is more likely, in fact, is that he will push around the edges and just hold tight as the market starts to gain comfort with Transocean again, bidding up its shares to more appropriate valuation levels.

Along for the Ride
Investors watch Carl Icahn closely. While he can afford to be wrong, he isn't as wealthy as he is because he makes lots of big mistakes. Transocean probably doesn't need anywhere near the amount of repair as some of Icahn's recent targets so this industry leader is likely to be a relatively easy ride for investors looking to tag along with a master investor.


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ReubenGBrewer has no position in any stocks mentioned. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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