Less than a year ago, when low oil prices and uncertainty about the timing of an economic recovery made investors nervous about energy bets, the oilfield services industry was the place to be, since oil producers couldn't afford not to continue drilling. Now, in the wake of what's said to be the biggest environmental disaster in U.S. history, the near-term outlook for oilfield services companies doesn't look nearly as bright. But for investors willing to stick with battered stocks such as Cameron International (CAM) or Halliburton (HAL)â??for a year or twoâ??stiffer regulations on drilling in the Gulf of Mexico could mean enhanced opportunities. And while the sector remains risky, there could be some bargains.
The near-term impact of the blowout of BP's (BP) Deepwater Horizon rig has been rough on companies working in the Gulf. On May 27, President Obama declared a six-month moratorium on all deepwater drilling in the Gulf of Mexico, which affects all wells drilled in waters deeper than 500 feet. The following day, Interior Secretary Ken Salazar announced tough safety and control regulations on rigs working in the Gulf. And on June 1, the Obama Administration said it was investigating whether any criminal or civil laws were violated in the rig disaster.
But since about 30 percent of the oil the U.S. consumes comes from the Gulf, it's unlikely the Obama Administration would choose to permanently ban drilling there, say some analysts. The fact that minerals royalties are a major source of federal revenue makes that option even more unlikely, according to Tim Parker, an energy analyst at T. Rowe Price (TROW).
The ban on deepwater drilling is sure to hurt oil services companies' earnings for the second half of 2010 and for the full year. Parker expects earnings to be reduced by 5 percent to 10 percent on the low end and 10 percent to 15 percent on the upper end. The impact might be worse if companies don't trim their cost structures, says Parker, who expects them to move personnel around to manage expenses.
Still, Parker sees this as a short-term money issue. "If you have a one-year time horizon, you'll be very happy owning these stocks," he says. "You could own these things for the next two years and get them cheap for the next six months."
In a research note for FBR Capital Markets (FBCM) on May 27, Rob MacKenzie estimated that Transocean's (RIG) earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2010 would drop by up to 14 percent if the deepwater permit moratorium were extended by six months and all its deepwater rigs working in the Gulf of Mexico went idle after its current wells for roughly another five months of downtime. Diamond Offshore's (DO) 2010 EBITDA would decrease by up to 28 percent under the same scenario. The financial impact of the drilling ban could be reduced if the rigs were hired to drill sidetrack wells, or secondary wellbores drilled away from the original hole, which are exempted from the drilling permit moratorium, or if rigs were moved to projects in other geographic regions, he wrote. MacKenzie reaffirmed his outperform rating on Transocean and market perform rating for Diamond Offshore.
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