Oil Drilling Stocks: BP Oil Spill Update

(Oil driller stocks story updated for Interior comments on rescinded permits)

GULF COAST, U.S. (TheStreet) -- While the BP(BP) oil spill disaster in the Gulf of Mexico is playing out at 5,000 feet beneath the ocean's surface, shallow-water drilling has been feeling the full effect of the crisis this week.

A confusing series of events that began on Tuesday and are still evolving on Friday morning have been toying with the outlook for Gulf of Mexico shallow-water drilling stocks, led by ENSCO(ESV), Rowan Companies(RDC), Seahawk Drilling(HAWK), and the most volatile of the bunch, under-$5 stock Hercules Offshore(HERO).

On Tuesday, the Minerals Management Service of the Interior Department issued the first new shallow-water permit since the BP oil spill crisis began, to Bandon Oil & Gas. Environmental groups went ballistic, but it was not until Thursday that the Interior Department changed its tune on granting the right to drill in shallow water. When Interior did change its tune, it did so in a way that only added to the uncertainty hanging over all offshore drilling stocks.

Early on Thursday afternoon, there were reports that the Interior Department had extended its moratorium on offshore drilling to shallow-water drilling in the Gulf of Mexico, too. There was an internal email from an MMS official that seemed to indicate a moratorium was in effect for shallow-water drilling.

The impact on already volatile offshore drillers was immediate and severe, and by Friday morning, the confusion caused by the report was still lingering even after clarification from the Interior Department.

Around 2 p.m. on Thursday, the shares of ENSCO, Rowan, Seahawk and Hercules saw their daily stock charts plummet to a level that looked as deep as the 5,000 feet under the ocean surface where the BP well is leaking.

Hercules, a highly leveraged and highly volatile stock on any day, was down 18% as the stories made the rounds of the BP oil spill-related market rumor mill. However, within an hour, the Interior Department denied the stories in a statement to the Washington Post, saying that shallow-water drilling continued as long as the projects met all the proper environmental and safety regulations, and the shares of these offshore drillers rebounded.