As BP Contains Spill, More Thoughts on the Cost

Among the greater casualties of today’s market turmoil are oil giant BP (BP) and its contract driller Transocean (RIG), whose shares have decline more sharply than the market average as BP was working to lower a containment dome onto the leaking well in the Gulf of Mexico.

The leak reached Louisiana’s cost line yesterday for the first time.

BP’s shares today are down $1.54, or 3%, at $48.79, while RIG is off $2.37, or 3.4%, at $67.33.

Steven Wood, oil and gas analyst at Moody’s Investor Services, today issued a report on the spill, writing that the impact will be felt across all the companies involved in the incident. Andarko Petroleum (APC) is a 25% partner in the project, and its liquidity could be affected if the spill lasts beyond three or four months, writes Wood.

Anadarko shares are off $1.23, or 2%, at $59.72.

Although Transocean has already recovered most of the cost of its lost rig, at $400 million, the company could still face liquidity issues from litigation, and also from crippling new legislation on deep water drilling.

Cameron International (CAM), maker of the “blow-out preventer” that was supposed to act as a fail-safe, and Halliburton (HAL), which performed services on the project, seem the safest for the moment, given their strong balance sheets, high levels of insurance, and limited liability. But that may change depending on the expanding impact of the spill, Wood observes.

As concerns RIG specifically, some analysts rushed to the firm’s defense today.

Gimme Credit’s Philip Adams, meanwhile, writes that Transocean’s bonds should outperform this year given that the company’s expenses are likely to be covered by its insurance and its free cash flow, though he warns that the cost could impact the company’s outstanding $3.9 billion share repurchase authorization.

FBR Capital Markets analyst Robert MacKenzie says that some drillers will be more affected by a recent Federal ban on new drilling projects.

Shallow-water drilling lasts only weeks, compared to months for deepwater projects, so he thinks stocks with a greater proportion of exposure to the shallow will be more greatly affected by the temporary ban.

They include Superior Energy Services (SPN), Hercules (HERO), Seahawk (HAWK), and Hornbeck Offshore (HOS).

Today those stocks are all trading down markedly, with SPN off $1.08, or 4%, at $24.39; HERO down 17 cents, or 5%, at $3.20; HAWK down 54 cents, or 4%, at $13.11; HOS is the only survivor, up 10 cents at $20.04.

While maintaining a “Market Perform” on Transocean, MacKenzie writes that the sell-off in the shares — they are down some 26% since the April 20 incident — seems overdone.

“We believe RIG may rally next week if the first cofferdam [the spill containment vessel], to be installed over the weekend, stems the flow,” writes MacKenzie. MacKenzie notes that the U.S.’s Oil Pollution Act “targets the operator,” which would be Transocean, but that’s not an “out for BP, he believes.

“Given that multiple contributing factors to the blowout, a finding that the blowout was caused solely by an act by Transocean seems highly unlikely if not impossible.,” writes MacKenzie.