These oil companies may not escape the spill
Can they still grow after the cleanup and amid continued economic uncertainty?
By Eric Rosenbaum, TheStreet
What’s preventing a breakout in oil stocks: the overhang from the BP (BP) oil spill or economic uncertainty?
BP had its best rally since the oil spill when the Macondo well was capped on July 15. Then, when the markets hit a three-month peak on Aug. 5, BP reached its highest price since the oil spill crisis began. Shortly after, BP shares ran out of gas.
The pattern is exactly the same for Transocean (RIG) and Anadarko Petroleum (APC), whose shares spiked when BP capped the well and climbed higher on August 5. They have since pulled back as concerns about global economic growth caused crude oil prices to drop below $80.
Which stocks are most likely to recover? Let’s look at four companies most affected by the disaster.
BP: Few are willing to take a chance on BP, the most visible player in the oil spill mess. Trading volume in BP shares this week has been at its lowest levels since the oil spill began. However, there’s one big event coming up that could be a positive catalyst.
BP made clear on its earnings conference call that it plans to release its interim report on the oil spill before the end of August. Transocean shares rallied when the Deepwater Horizon rig operator accused BP of gross negligence in a regulatory filing.
Now it's BP’s turn in the Gulf of Mexico war of words, and investors are interested to see what BP has to offer in its defense. In its oil spill interim report, BP will stake out a position that the blame needs to be shared. BP only needs to show that multiple parties were at fault to help it get off the hook for gross negligence.
While the report could lift BP shares, they’re likely to plunge if new legislation bars the company from operating new wells in the Gulf. If that happens, BP would probably need to sell its stakes in U.S. assets.
Transocean: A month ago, Transocean’s negligence claims again BP helped the shares rebound from a more than 50% decline since the spill.
"When Transocean published that language, that was the easy money," said Collin Gerry, analyst at Raymond James. When Transocean shares hit $57, Raymond James downgraded the shares to “hold.” Transocean shares are still down 41% from its pre-spill price and that’s unlikely to change, some analysts say.
"Transocean is back in the oil-spill cross-hairs," said Sterne Agee analyst David Havens. There have been a series of damaging stories in the press about safety lapses in Transocean rig operations.
Transocean's recent woes are reminiscent of what BP was going through during the worst lows of the oil spill punishment meted out by the market. Earlier this week, Moody's downgraded Transocean debt, citing "significant liability exposure ... and concern as to whether it will be fully protected under its indemnification from BP."
Earlier in the week, a Swiss court blocked Transocean's plan to pay out a dividend to shareholders, an international precedent that echoed the battle between the White House and BP over the oil giant's dividend. Some may have read the Swiss court decision as a signal that it thinks Transocean is going to be on the hook for a much greater share of the oil spill liability pie than the rig operator is letting on to.
"The fact that the Swiss court didn't approve the dividend does kind of raise the specter of Transocean not being as able to get off scot free," Weiss said.
There is not enough information to make an educated assignment of risk on Transocean's liability above and beyond insurance, said Sterne Agee analyst David Havens.
"There's little tangible safety data, but I don't think anything right now is a short-able offense. You short Transocean stock at $85, not in $50s," Havens said.
At the end of the day, the drilling stocks live and die on the day rates for deepwater projects. The deal Transocean recently announced with Chevron (CVX) supported the belief that rates are stabilizing in the range of $400,000 to $450,000. Energy analysts suggest that the recent gains in the price of oil could help to tighten the market a little, and suggest conviction for a low-end for deepwater day rates around $400,000. Yet it's the leading edge of day rates that remains a wildcard.
"I'm not as bullish in the near-term. The dust still needs to settle on supply and demand, and even if the stocks have pulled back, it's hard to find positive catalysts. These stocks can stay cheap for a while," said Raymond James' Gerry.
Anadarko: BP and Transocean are the primary combatants in the oil-spill blame game. For all of Anadarko's tough talk of gross negligence on the part of BP, few think the independent oil company is going to walk away from its minority interest in the BP Macondo well without damage.
Anadarko might not end up paying a full 25% of its potential oil spill liability, but it might end up settling.
Investors also remain concerned that potential legislation might scare the company away from deepwater projects. The international oil market has also been sluggish, complicating matters.
If the fallout of the Gulf spill and limits on offshore drilling causes the industry the shrink, Anadarko could benefit. Fewer companies would share in the oil supply. However, it's an incremental positive that could play out in the second half of 2011 and 2012.
Cameron's blowout preventer (BOP) may have failed in its duty as the ultimate failsafe, and that fact may have made Cameron a shorting candidate in the spill's immediate aftermath. Now, though, it's an argument about the type of business opportunity that the new era of drilling may present for the BOP manufacturer. The new era of more tightly regulated drilling means more work for Cameron to improve the BOP technology. Or does it?
For a time, some investors speculated that Cameron would lead the way in designing and selling a more expensive BOP as a result of the oil spill. Cameron is the largest BOP manufacturer in the market, but now the big rebuild cycle in blowout preventers doesn't seem like such a sure thing, and some of the estimates of the size of the potential business opportunity have been scrapped.
A brand new, more expensive BOP could be a $50 million sale, whereas repair and maintenance of existing blowout preventers could be a $2 million to $5 million business opportunity, according to estimates provided by Cameron competitor National-Oilwell Varco (NOV) on its recent earnings call.
"People were just assuming a big BOP rebuild cycle and counting up the total number of rigs around the world and looking at Cameron's near-50% market share. That would have been a nice one-time cash flow item," said Sterne Agee analyst David Havens.
In the past week, earnings estimates for Cameron have risen across the board since it reported second quarter earnings, covering the next two quarters and full year 2011 Street consensus.
Cameron shares aren't back to pre-oil spill value, when it was trading at $47, but that was a 52-week high level. Cameron shares did rise to $41 around the second-quarter earnings. Cameron would certainly like investors to see the glass as half-full in the new era of drilling, too. "It's going to happen all over the world," Cameron CEO Jack Moore said during the earnings conference call. "We're getting requests in every corner of the world from our customers to support this, and so we have to ramp that up to meet it both with personnel and with infrastructure."
In conclusion, one can make the case that oil spill liability weighs more heavily on BP and Transocean than it does on Anadarko. Transocean owned the rig that exploded, triggering the leak, and BP was renting it. But Anadarko probably won’t be able to escape the hit it will take as the owner of a 25% stake in the well, despite its negligence claims against BP. Legislation preventing offshore drilling might delay projects and cause smaller players to fold, raising questions for the industry.
"The biggest overhang is the economy right now,” said Argus Research analyst Phil Weiss. “Every time oil prices move up, they pull back. I've been arguing that oil prices are too high, and so to me it's not surprising that we've had false starts and are retracing steps."
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