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Gulf Troubles Spill Across
Multiple Energy-Related Sectors
George Putnam, III
The Turnaround Letter
British Petroleum has borne the brunt of the negative headlines relating to the catastrophic oil spill from its failed Deepwater Horizon drilling rig in the Gulf of Mexico - followed by Transocean, the owner/operator of the rig, and Halliburton, the servicer whose actions may have contributed to the explosion on the rig. Nonetheless, many stocks across the oil and gas, drilling & exploration and oilfield equipment & services sectors have been hit hard as a result of the accident. For example, while BP has lost $55 billion in market capitalization, or 29% of its value since the explosion on April 21, Chevron and Exxon are both down 10% or more over the same period. Similarly, while Transocean is down 37%, its competitor Diamond Offshore has dropped 30%; and Halliburton is off by 25%, while sector Schlumberger has lost 17%.
Is the problem at Deepwater Horizon really serious? Of course. But has the market overeacted to it? We think that is quite likely. For example, BP will undoubtedly incur massive expenses and legal liability as a result of the spill, but our guess is that the total bill will fall well short of the $55 billion hit that the stock has taken. Sure, there is loss of reputation to figure in as well, but BP remains one of the largest energy companies in the world with enormous assets and powerful marketing clout.
Likewise, we believe that many of the other premier names in the energy sector have been beaten down by the recent headlines to levels where they look very attractive. There seems to be a concern that the whole industry will be hurt by new restrictions on offshore drilling. But unless the world is willing to cut back on oil use - which doesn't seem likely anytime soon - the oil has to come from somewhere. And it is the companies in the integrated oil & gas, drilling & exploration and equipment & services sectors that will profit from development and distributing the oil. In the paragraphs below we look at some of the major players in those sectors.
Major Integrated Oil & Gas
British Petroleum (BP: $42.95) isn't likely to get out of the crosshairs anytime soon. However, with some $13 billion in annual free cash flow and many billions more in cash holdings and unused loan capacity, BP should be able to handle the fallout.
Chevron (CVX: $73.87) and Exxon (XOM: $60.46), the two domestic behemoths, have fared better than BP, though both stocks are well off their recent highs. Exxon's stock was already weak because of the company's planned $41 billion stock acquisition of XTO Energy, and it is now trading as a nearly four-year low. Chevron has held up better. Either stock would be a good core energy holding, and both have healthy yields.
Oil & Gas Drilling Exploration
Diamond Offshore (DO: $63.10) has proved to be collateral damaged to the Gulf calamity, as evidenced not only by its stock decline but also by preemptively evacuating a drilling rig that was operating near the explosion. Diamond has some exposure to the Gulf via its fleet of deep water drilling assets, but about 59% of revenues come from outside the U.S. Having upgraded and expanded its fleet in recent years, Diamond is facing reduced capital spending going forward.
Statoil ASA (STO: $20.10) is a Norwegian-based integrated oil company that operates in Norway and internationally but with little exposure to the Gulf of Mexico. The firm's operations go beyond drilling to include refining and marketing though it 'officially' falls in with the drilling and exploration sector. Statoil provides interesting diversification opportunities.
Transocean (RIG: $56.77) is the owner/operator of the 'Deepwater Horizon' drilling rig that now lies at the bottom of the Gulf of Mexico. The rig was fully insured and much has already been recovered. Ongoing legal risks are real, but Transocean's expertise in deepwater drilling will remain in demand as evidence by the firm's roughly $28.4 billion backlog. It's noteworthy that nearly 88% of its drilling operations are outside the Gulf of Mexico.
Oil & Gas Equipment Services
Cameron International (CAM: $36.20) made the blow-out preventer that sat atop British Petroleum's failed rig. Most analysts see the bulk of legal risk falling on British Petroleum, and Cameron holds $500 million of liability insurance. Nonetheless, the stock is off 20% since the accident. Only about 13% of Cameron's revenues are from deepwater drilling. Moreover, increased regulatory oversight might actually help Cameron in the long run since about two-thirds of its business relates to pressure-control equipment used at the wellhead.
Halliburton's (HAL: $24.83) participation in the Gulf crisis stems from its having capped the well as exploration efforts came to a close. Halliburton claims its work followed designs approved by British Petroleum. And though the company's CEO feels Halliburton is "fully indemnified," investigations are far from complete. But the company's 25% loss of market capitalization or just short of $8 billion is likely outsized relative to any eventual liability. With 61% of revenues derived from international markets, Halliburton is an integral player in the world's exploration activities.
Schlumberger (SLB: $56.15) is the world's leading oilfield services company. It is in the process of getting even bigger with the proposed acquisition of Smith International, which would help keep Schlumberger at the cutting edge of drilling technology.
Editor's Note: George Putnam, III is editor of The Turnaround Letter, 225 Friend St., Ste. 801, Boston, MA 02114, 1 year, 12 issues, $195.
The Turnaround Letter focuses on bankruptcy and turnaround investing and is one of the most successful investment newsletters on the market today. Mr. Putnam is one of the nation's leading experts on bankruptcies and turnaround investing and his keen insight has resulted in The Turnaround Letter being ranked as the second best investment newsletter over the last 20 years with a 13.1 annualized return, according to The Hulbert Financial Digest, a service of MarketWatch which monitors the stock recommendations of 180 investment newsletters. For more information visit the website at www.turnaroundletter.com.
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