Publish date:

Oil Drilling Losers: Transocean, Diamond

It's another losing day for some big oil drilling stocks on Tuesday, as the BP oil spill continues to tarnish the entire oil sector.

(Oil drilling stock losers story updated for Tuesday market close, Taylor Energy response to reports of leaking Diamond Offshore rig)

NEW YORK (

TheStreet

) -- Offshore drilling stocks didn't need another reason to be beaten down by investors, but they got one on Tuesday, with

Goldman Sachs

(GS) - Get Report

deciding it was time to issue some downgrades related to the

BP

(BP) - Get Report

oil spill.

Seven weeks into the BP oil spill, it might seem like Goldman Sachs is a Johnny Come Lately among the Street firms in conceding that oil stocks might be impacted by the spill. Yet some might contend that Goldman has not gone far enough in its downgrades for firms like BP and Transocean, which have lost up to 40% of their market value since April 20.

On Monday, Goldman downgraded BP from buy to hold, but that might seem a minor concession from the investment bank considering that the market is still abuzz with speculation that BP will not survive this oil spill -- the latest BP takeover rumor-mongering was in the pages of the

New York Times'

Dealbook on Tuesday. Over the weekend, it was reported that Goldman bankers were preparing a defense strategy for BP from any takeover attempts.

On Tuesday, Goldman took

Transocean

(RIG) - Get Report

, the oil rig operator at the heart of the BP oil spill, down from buy to neutral. Transocean shares had already lost approximately 40% of their market value since the beginning of the BP oil spill. Even if the Goldman downgrade seems like a little, and late, Goldman's power in the market showed itself even at this late date in the oil stock crisis. Transocean shares were down close to 10% at midday Tuesday, and had already surpassed their average daily trading volume of 19 million shares.

Transocean shares ended Tuesday down close to 6%, and that was an improvement over a 52-week low of $44.05 reached on Tuesday morning. BP finished down by roughly the same amount on Tuesday, and also reached a new 52-week low on Tuesday during trading before finishing the day slightly above that new low share price level.

In a BP oil spill understatement, Goldman analysts wrote on Tuesday, "We believe that the Macondo oil spill is likely to have a long lasting impact on the industry and most negatively impact the deep water drillers." More specifically, Goldman wrote, "We think that the current six month moratorium on deep water drilling in the U.S. could be extended and now assume that it lasts 12 months with limited activity until 2012; deep -water day rates are likely to face pressure."

The Goldman downgrade to hold might seem like a benign call on such beaten-down shares, however, it does mirror much of the Street sentiment that while BP, Transocean and other oil stocks have been pummeled, it is hard to justify a buying-at-cheap-value argument given the liability overhang, and the unquantifiable repercussions for not just BP and Transocean, but the entire offshore-drilling sector.

In fact, Goldman made the Transocean downgrade on Tuesday concurrent with downgrades for

Atwood Oceanics

(ATW)

and

Diamond Offshore Drilling

(DO) - Get Report

, both being taken from a hold to a sell.

The news was even worse for Diamond Offshore on Tuesday than just a downgrade from Goldman Sachs, with unconfirmed reports spreading through the media that Diamond's Ocean Saratoga rig in the Gulf of Mexico was leaking.

Businessinside.com

reported that a pilot who flew over the Diamond rig saw a plume of oil and there were reports of photos from the site that purported to show chemical dispersants being used on leaking oil. Taylor Energy leased the rig from Diamond.

TST Recommends

Late on Tuesday afternoon, Taylor Energy issued a press release saying that the report was wrong. In fact, the leak in the well for which Taylor has been using the Diamond Offshore Ocean Saratoga rig dates back to Hurricane Ivan in 2004.

Taylor Energy said its ongoing well intervention program using the Diamond Ocean Saratoga started when the platform was toppled by a subsurface mud slide triggered by storm surges with 100 foot waves for 16-18 second periods during the 2004 hurricane.

Three subsurface containment domes and six well interventions have been part of the containment effort for years, Taylor Energy said.

Taylor Energy said the photos quoted in the press as proof of the oil spill were photos of boats involved in regularly scheduled subsea containment system drainage, and that tanks that were identified in press reports as chemical dispersants, were in fact oil storage tanks.

The Saratoga rig is located in much shallower waters than the BP well -- only a little deeper than the shallow-water cutoff of 500 feet -- and at 12 miles off the coast of Louisiana, as opposed to 50 miles for the leaking BP well.

Diamond Offshore had said earlier on Tuesday that Diamond Offshore was hired by Taylor Energy to plug and abandon the existing well.

Atwood and Diamond were downgraded on fears that day rates in the Gulf of Mexico would be hurt by the oil spill, and FBR Capital agreed with Goldman's assessment, also downgraded Diamond on Tuesday from hold to sell, citing the impact of the BP oil spill on the deepwater business.

Atwood Oceanics and Diamond Offshore were right behind Transocean in leading the race for BP oil spill-related market losses on Tuesday, but by the close on Tuesday, the Diamond Offshore losses were under 4% -- though on fur times its average daily volume of trading.

Atwood Oceanic's decline of 6.5% on Tuesday, and a loss of 5.7% in shares of

Seahawk Drilling

(HAWK)

were the largest losses among the offshore drilling stocks.

FBR also took

Baker Hughes

(BHI)

down a notch from buy to hold, citing the offshore drilling moratorium and delays in the Gulf of Mexico, but Baker Hughes was able to recover from early losses on Tuesday and finish trading marginally positive.

President Obama for the first time on Tuesday took an angry tone in his comments about the BP oil spill, saying he was looking for whose "ass to kick," but the market was doing its part to "kick the ass" of all the oil spill stocks anyway.

BP claimed success with its cap siphoning off oil to the surface, but facing new criticism that its cap effort may have actually increased the total oil leak flow rate by as much as 7 times, BP shares were down close to 5% on Tuesday at midday.

The never-ending breaking news in the offshore drilling sector wasn't just deep sea related on Tuesday. Last week, the Minerals Management Service of the Interior Department rescinded on Thursday two permits for shallow-water drilling that it had just been issued this week, muddying the outlook for offshore drillers in the shallow waters of the Gulf of Mexico.

>>Oil Drilling Stock Losers: BP Oil Spill Impact

By Tuesday, the U.S. Interior Department was expected to shortly release new rules for shallow-water drilling in U.S. waters, in the least to help end confusion within the already embattled sector and for its investors.

Interior is expected to mandate that shallow-water drillers implement new safety and environmental checks before they can be approved for any new drilling permits in Gulf shallow-water areas less than 500 feet deep.

It was still unclear on Tuesday, though, whether companies already conducting shallow water drilling would have to refile on existing permits and prove that they meet the safety and environmental checks, but there were reports on Tuesday morning that at least some companies were being told by the Interior Department that this would be the case.

BP Oil Spill Update

BP Oil Spill Update: Obama to Kick Ass

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>Oil Spill in Pictures: Gulf of Mexico Impact

Follow TheStreet.com on

Twitter

and become a fan on

Facebook.

Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.