After spilling more than 4 million barrels of crude oil — enough to fill two supertankers — into the Gulf of Mexico, the Deepwater Horizon oil well was sealed by BP on July 15. While the disaster’s environmental impact may take years to assess, does it spell crisis or opportunity for the energy sector?
Now that the Deepwater Horizon oil well appears to be successfully capped, will the related shock to oil company stocks be lasting or short-lived?
For those companies directly involved in the Deepwater Horizon spill, risks remain that the ultimate cost, such as clean-up, fines, and lawsuits, could end up significantly more substantial than the market’s estimate. However, for the rest of the oil industry, the ultimate impact on company stock values will likely be short-lived, in my view. Without question, we are going to see a rise in the cost of drilling in the Gulf of Mexico but not enough to diminish the long-term economic benefits of exploring and drilling in this hydrocarbon-rich basin. In the short term, the length of the moratorium can hurt stock performance.
My expectation is that by late fall we will have a better understanding of the new rules of the game and have some visibility into the industry getting back to work by early next year. A longer delay could cause the oil-service stocks — the very companies that provide the equipment used for exploring and drilling — to see more selling pressure.
Are there energy companies that could see an increase in business as a result of the new safeguards and regulations that will be instituted in the wake of the spill?
As portfolio managers, we are closely following two issues that appear to be emerging from the spill. One is the potential for increased requirements going forward for blowout prevention equipment designed to shut down a gushing oil well. The other involves changes to the monetary liability caps in the event of a future spill. While a resolution is far off at this point, it is my opinion that we will see additional blowout prevention requirements that will benefit certain equipment manufactures.
The liability cap issue is more murky. Some in Congress propose eliminating liability caps altogether. If that’s where we’re headed, many smaller players will leave the Gulf of Mexico, reducing competition and likely benefiting the large, well-capitalized companies.
Shortly after the spill occurred in April, President Obama issued a moratorium on issuing new offshore drilling permits in the Gulf. What types of companies within the energy sector have been most affected by this moratorium?
The moratorium has had a noticeable effect on the oil-service industry. For the most part, the drilling rig companies have been protected by long-term contracts. However, companies that sell the services used during the drilling process don’t enjoy the same protection. Their business has simply gone away, and their stocks have understandably not performed well. The industry has responded by moving equipment to other markets and by laying off employees. If activity resumes in early 2011, the earnings expectations for next year are probably appropriate. Further delays could result in another round of earnings cuts, and the stocks would likely suffer.
The energy companies that own the prospecting rights in the Gulf also have been hurt, but the impact has not been as severe. Although these companies would have liked to execute their exploration programs in the second half of 2010, they can easily delay them without losing much value.
Past performance is not a guarantee of future results.