Update on Transocean's Deepwater Horizon Morningstar April 23, 2010 Transocean's Rig Deepwater Horizon caught fire Tuesday evening and eventually sank Thursday morning.  The vast majority of the 126 crew aboard the rig are safe, but 11 workers are still missing, and several are critically injured.  Transocean has not yet confirmed the cause of the fire and explosion, but we suspect it was probably a gas or oil blowout caused by the failure of Horizon's blowout preventer. The loss of the rig is unfortunate for the firm, as it was one of Transocean's most advanced and recently set a world record for drilling depth in the Gulf of Mexico.  The cost to replace the rig will be in the $600 million-$700 million range, but we expect insurance to cover the bulk of the rig's cost.  We also do not anticipate significant changes in the regulatory environment or fines for Transocean.  The contractor is one of the industry's most safety-conscious and experienced deep-water drillers.  As well, the rig won a safety award from the Minerals Management Service last year, and the agency found no safety violations during three routine inspections of the rig earlier this year. However, the financial impact could be more material for the cleanup of spilled oil and the loss of revenue from the contracts with BP.  It is not clear how much the cleanup could cost Transocean, as the effort is still ongoing.  However, the Horizon was due to begin a new three-year contract with BP for $497,000 a day in September.  The rig's existing day rate is set using a quarterly average from Transocean's other ultra-deep-water rigs in the Gulf.  If we assume $500,000 a day for the remaining five months of its current contract, Transocean's total lost revenue is around $620 million.  This would translate into about $300 million in EBITDA over the next three and a half years, which is immaterial to our valuation.