Transocean LTD (NYSE:RIG), the drilling company that own the rig implicated in the 2010 Deepwater Horizon oil spillage disaster, is set to pay a $1.4bn fine.

Transocean Logo

The Justice Department said on Thursday that Transocean LTD (NYSE:RIG) will plead guilty to breaching the Clean Water Act. The agreement was filed by the Justice Department in a Louisiana court on Thursday. A judge is yet to approve the settlement.

Shares of Transocean rose considerably on news of the settlement, with the company closing up by six percent, at $49.20 per share – its highest in 28 months.

“This settlement is definitely a strong positive for the company and should put the biggest issues regarding the oil spill behind them,” said Brian Youngberg, an analyst at Edward Jones & Co.

The Switzerland based driller’s fine consists of a $400 million criminal fine, with a further $1bn in civil penalties, plus interest. The Deepwater Horizon oil spill disaster resulted in the deaths of 11 workers and the spillage over a million barrels of crude into the sea.

Fishing in the area was halted for months during the pollution and resulting clean-up. The affected area in the Gulf of Mexico was the size of Nebraska.

Transocean LTD (NYSE:RIG)’s stock is set to undergo a “significant valuation recalibration,” according to James C. West, an analyst at Barclays Capital Inc. in New York. Furthermore, West thinks that  the settlement is below Barclays’ $2.5 billion estimate and he thinks could pave the way for a significant valuation recalibration as clarity on the company’s Macondo liability is one of the company’s last strategic imperatives in its “Road to Recovery.”

Laurence Balter, who works at Oracle Investment Research in Washington and helps to manage shares worth a $100m, including Transocean shares, said: “The painful lesson learned for Transocean and these other companies involved in deep-water exploration is that going forward they have to put the environment ahead of profit.”

BP plc (NYSE:BP) (LON:BP), who owned the drilling rights to the Macondo well where the accident happened, leased the rig from Transocean.

As of September 30, 2012, Transocean had established a liability for estimated loss contingencies related to Macondo of $1.95 billion. The contingent liability associated with the pending DOJ settlement is included in this estimate. Thus, when today’s announced agreement with the DOJ is finalized, the contingent liability will be reduced by $1.4 billion, leaving $550 million as the minimum estimated remaining cost to settle other Macondo-related liabilities, including a settlement with the Plaintiff’s Steering Committee (PSC).

BP plc (NYSE:BP) (LON:BP) employees directed the drilling operations, and the company has agreed to cough up a record $4bn in criminal penalties, as well as pleading guilty to manslaughter and other criminal charges connected to the spill. The government’s civil claims against the company are as yet unresolved.

If the government does recover money from BP for violations of the Clean Water Act, the law requires that the majority of it be spent to restore the affected area.

BP must be glad that the Deepwater Horizon incident is behind them. In the aftermath of the spillage, the company sold $38bn in assets to pay off the expenses of the spillage.

Earlier this year, BP transferred its claims against Transocean to the PSC, and the PSC made a settlement proposal that was far in excess of Transocean’s settlement amount with the DOJ. Transocean rejected that proposal and has not had further discussions with either BP or the PSC since March 2012. Neither BP nor the PSC has won a court decision against Transocean, and they have not proved their claims of gross negligence against the company. RIG could decide to settle with the PSC in the future, but probably for much less than the amount of the DOJ settlement.