NEW YORK (
) -- Range-bound seems to be the rule for BP oil spill stocks. Is a breakout by oil stocks dependent on an end to the oil spill overhang, or is it just the macroeconomic uncertainty that's limiting signs of life from the energy sector?
If oil stocks are stuck, there is no one right answer. The double whammy of the Gulf of Mexico oil spill and the global doubts about a sustained recovery don't suggest that the stocks most acutely linked to the oil spill and its aftermath are going to shoot up, geyser-like, in rapid succession.
One can look at the extent to which the oil stocks still haven't recovered since the day of ignominy, April 20, and draw the conclusion that a move up has to occur sooner rather than later. In fact, the oil spill stocks haven't lacked rallies, but the moves up have been in fits and starts. That's the way it's likely to remain, too, especially for
Take BP. The oil company had its best rally since the oil spill when the Macondo well was capped on July 15. Then, when the markets hit a three-month peak around August 5, BP reached its highest price since the oil spill crisis began. Yet shortly thereafter, BP shares ran out of gas.
The pattern is exactly the same for Transocean and Anadarko, both of which spiked when BP capped the well, and moved higher still on August 5, but have since pulled back as uncertain global growth has made the just recently attained $80 crude oil price already a thing of the past.
The tug of war between the oil spill overhang and the larger economic outlook has these stocks positioned on a sliding scale of share discounting. One can make the case that oil spill liability weighs more heavily on BP and Transocean than it does on Anadarko, even if Anadarko's gross negligence claims against BP are not likely to result in an escape from at least a significant portion of the 25% liability for which Anadarko remains theoretically on the hook.
"These stocks are more likely than not range-bound for a long time to come," said Argus Research analyst Phil Weiss. "The biggest overhang is the economy right now. That's the biggest backdrop. Every time oil prices move up, they pull back. I've been arguing that oil prices are too high, and so to me it's not surprising that we've had false starts and are retracing steps."
Some say the conventional wisdom holds that every time oil doubles in price, it's due for a big fall. Consumers won't be able to handle the rapid rise in prices and a recession is likely. Yet, when oil has dropped from $147 to $33 and then to $80, does the conventional wisdom still hold? The oil sector is beset by fears that new legislation in response to the oil spill will delay projects and push some players out of the deepwater market. Yet, if so, it's a double-edged sword for oil companies, with the potential to bring supply and demand into balance sooner than expected.
In any event, since pinning down the macroeconomic future and regulatory outlook for the energy sector is a fool's errand, the following looks at company-specific factors that may move these oil spill stocks -- not that it's necessarily to be upward momentum.
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Who has the guts to take a gamble on BP?
The answer: not many investors, at least not recently. Trading volume in BP shares this week has been at its lowest levels since the oil spill began.
There is one big event coming up that could be a positive catalyst for BP, too.
BP made clear on its earnings conference call that it plans to release its interim report on the oil spill cause(s) before the end of August. Transocean shares received a big rally when the Deepwater Horizon rig operator's 10-Q filing detailed in blunt language its view of oil spill liabilities predicated on gross negligence charges against BP.
Now it's BP turns in the Gulf of Mexico war of words, and the Street and investors are interested to see what BP has to offer in its defense.
BP will stake out a position that the blame needs to be shared -- but it's unlikely, and even dangerous, for BP to attempt to pass the buck too much in its oil spill interim report. There are, no doubt, going to be issues with Transocean and even issues involving the government's Minerals Management Service, and that's on top of the fact that it's setting the legal bar as high as possible to prove gross negligence. In fact, in the just-released Obama administration review of the drilling approval process that led to the BP well disaster, the government chose its words very carefully, writing that "mindful of the legal complexity" of the BP oil spill, it would not pass judgment on the "substantive adequacy" of the MMS process.
In the end, BP does not need to do more than show that multiple parties were at fault, and that approach should get them off the gross negligence hook.
Yet it's safe to assume that many investors have already discounted a report from BP assigning multiple causes to multiple companies. Any marginally more positive outlook for BP resulting from the interim report is likely less potent than the potential for legislation to take away BP's ability to serve as operator of new wells in the Gulf of Mexico.
This legislative uncertainty, suggesting a worst-case scenario in which BP has to sell majority stakes in U.S. interests, is among the negative catalysts that BP won't be shaking any time soon -- and, coupled with the macroeconomic outlook, means that the $41 share price that BP reached in early August could set the bar for some time to come.
The clouds hovering over Transocean have darkened.
Just a month ago, sentiment seemed very different on the world's biggest rig operator. Its gross negligence attack on BP was a bold salvo, and its shares made up at least some ground from the more than 50% crater in Transocean share value after the oil spill. "When Transocean published that language, that was the easy money," said Collin Gerry, analyst at Raymond James. When Transocean shares hit $57, Raymond James downgraded to a hold, and this is in line with the belief that shares are range-bound for the foreseeable future. Transocean shares are still down 41% from its pre-oil spill price, yet it's sentiment that has dipped more recently.
"Transocean is back in the oil-spill cross-hairs," said Sterne Agee analyst David Havens.
Indeed, there have been a series of damaging stories in the press about safety lapses in Transocean rig operations that seem as if they could make for a Cliff Notes version of the BP interim oil-spill report. Analysts say there's no doubt it's in BP's interest to shift the gross negligence attacks somewhere else -- and it would not be surprising if some of the documents leaked to the press originated from blacked-out BP email addresses.
Transocean's recent woes are reminiscent of what BP was going through during the worst lows of the oil spill punishment meted out by the market. Just yesterday, Moody's Investor Service downgraded Transocean debt, reflecting the fact that Transocean faces "significant liability exposure ... and concern as to whether it will be fully protected under its indemnification from BP."
Earlier in the week, a Swiss court blocked Transocean's plan to pay out a dividend to shareholders, an international precedent that echoed the battle between the White House and BP over the oil giant's dividend. Some may have read the Swiss court decision as a signal that it thinks Transocean is going to be on the hook for a much greater share of the oil spill liability pie than the rig operator is letting on to.
"The fact that the Swiss court didn't approve the dividend does kind of raise the specter of Transocean not being as able to get off scot free," said Argus Research analyst Phil Weiss. This type of read-through is probably beside the point, though, in why Transocean seems worse-off today than a month or two ago.
The Transocean dividend issue is not on the same level as it was for BP, where the dividend was a primary lure for investors. However, when Street analysts were talking about Transocean from a yield perspective, the dividend was a carrot being dangled. Now, Transocean cash used to buoy investor sentiments rests on share repurchase activity, and whereas a dividend is set in stone -- at least until the courts say it isn't -- companies can talk up share repurchase plans but take their sweet time getting to it.
In any event, the issue that has grown in prominence above all is that safety is an area of Transocean's business for which visibility has not been great in the past -- a one-page summary document -- and that has stoked fears from the investment community.
There is not enough information to make an educated assignment of risk on Transocean's liability above and beyond insurance, in the opinion of Sterne Agee analyst David Havens. Investors need to bear in mind where Transocean shares are trading, though. "There's little tangible safety data, but I don't think anything right now is a short-able offense. You short Transocean stock at $85, not in $50s," Havens said.
Attempting to think outside the oil-spill box, one hears a lot of hopeful talk about the macroeconomic environment in talking to the Street about Transocean. "All it takes is any kind of improvement in the economic outlook and it's suddenly supportive of Transocean shares." Or, "longer-term, in a year or so, drillers could be compelling." The stocks may have pulled back so much that they appear cheap, but how far out is the rally from the depressed levels?
At the end of the day, the drilling stocks live and die on the day rates for deepwater projects. The deal Transocean recently announced with Chevron supported the belief that rates are stabilizing in the range of $400,000 to $450,000. Energy analysts suggest that the recent gains in the price of oil could help to tighten the market a little, and suggest conviction for a low-end for deepwater day rates around $400,000. Yet it's the leading edge of day rates that remains a wildcard.
"I'm not as bullish in the near-term. The dust still needs to settle on supply and demand, and even if the stocks have pulled back, it's hard to find positive catalysts. These stocks can stay cheap for a while," said Raymond James' Gerry.
How will Anadarko Petroleum fair in the BP interim report?
The oil-spill blame game is going to remain one with BP and Transocean as primary combatants. For all of Anadarko's tough talk of gross negligence on the part of BP, though, few think the independent oil company is going to walk away from its minority interest in the BP Macondo well scot free.
Anadarko Petroleum's big bluff doesn't mean that it is going to end up paying a full 25% of its potential oil spill liability, but it indicates that Anadarko, which hasn't paid a red cent to BP yet, will end up settling. "Anadarko will pay somewhere between zero and 25%," said Argus Research analyst Phil Weiss.
If the hedging of the Anadarko liability bet offered by the Argus analyst seems too wide a range to offer the confused investor help, it's important to consider another fact: the liability issue is only one of two big reasons why Anadarko shares are likely to remain range-bound. One of three, actually, excluding macroeconomic influence on the energy sector.
Beyond how much Anadarko will owe as a result of the oil spill, investors remain concerned about legislation having the potential to scare the company away from deepwater projects. Taken together, these factors create an Anadarko share dilemma that oscillates between being already discounted and an incremental negative.
Additionally, the kind of positive exploration news that has in the past served as a positive catalyst for stocks like Anadarko has picked a bad time to be featured less and less. It was an irony of oil sector fate that the positive catalysts ahead of the oil spill were primarily related to projects in the U.S., as international markets remained, and remain today, awaiting broad-based recovery.
The lack of punch from international operations could be measured in the earnings coming out from the oil services companies, which in the first quarter were talking up hope of an international markets recovery as the U.S. market dipped during the federal moratorium on drilling. Markets like northeast Africa -- where, incidentally, Anadarko just announced a discovery on Tuesday -- were a laggard in earnings from
One overhang from the oil spill that Anadarko doesn't face is the potential for barrels of oil currently embedded in its share value to be taken away. Unlike the risk of BP being forced to alter its role in U.S. projects, Anadarko faces project delays and potentially higher costs, as will any oil company.
However, at the end of the day, or in this case at the end of the legislative process and return to full throttle in U.S. drilling operations, Anadarko presumably will be able to extract the same amount of barrels, even if it takes longer. Couple this with the argument that project delays will push back supply and bring supply and demand into balance sooner than previously imagined, and it could be an incremental positive for Anadarko. Yet, it's an incremental positive that could play out in the second half of 2011 and into 2012.
It's one less oil spill overhang, but it doesn't argue for a quick distancing of Anadarko from the oil pack.
If there's a de facto oil spill profiteer among the group of stocks directly linked to the Gulf disaster, it's Cameron International.
Cameron's blowout preventer (BOP) may have failed in its duty as the ultimate failsafe, and that fact may have made Cameron a shorting candidate in the spill's immediate aftermath. Now, though, it's an argument about the type of business opportunity that the new era of drilling may present for the BOP manufacturer. The new era of more tightly regulated drilling means more work for Cameron to improve the BOP technology. Or does it?
There was a short period of time during which the attacks on the blowout preventer led to the belief that Cameron would lead the way in designing and selling a more expensive BOP as a result of the oil spill. Cameron is by far the largest BOP manufacturer in the market, but now the big rebuild cycle in blowout preventers doesn't seem like such a sure thing, and some of the estimates that at first were put out for the size of the potential business opportunity have been scrapped.
A brand new, more expensive BOP could be a $50 million sale, whereas repair and maintenance of existing blowout preventers could be a $2 million to $5 million business opportunity, according to estimates provided by Cameron competitor
on its recent earnings call.
It's the difference between a one-time huge sale, albeit non-repeatable, and an incremental positive from what energy market experts call the "razor blade" business -- referencing the consumer goods world, and not just selling the razor, but also the replacement razor cartridges.
"People were just assuming a big BOP rebuild cycle and counting up the total number of rigs around the world and looking at Cameron's near-50% market share. That would have been a nice one-time cash flow item, but the razor blade business might be more interesting," said Sterne Agee analyst David Havens.
Cameron's earnings beat the Street by 3 cents in the second quarter, though it wasn't a clear beat, with year over year comparisons negative, and revenue short of Street expectations. Cameron did raise its full year earnings guidance. With expectations that the government will call for more intense and frequent drilling inspections, it holds the potential for more of the razor blade work for Cameron.
Still, an incremental positive may not lead to a significant change in how one values a company. The epicenter of interest in Cameron has been intrigue about changes to the blowout preventer business and with a backlog uplift for Cameron based on the razor blade theory, there could be earnings upside over the next year.
In the past week, earnings estimates for Cameron have risen across the board since it reported second quarter earnings, covering the next two quarters and full year 2011 Street consensus.
Cameron shares aren't back to pre-oil spill value, when it was trading at $47, but that was a 52-week high level. Cameron shares did rise to $41 around the second-quarter earnings. Cameron would certainly like investors to see the glass as half-full in the new era of drilling, too. "It's going to happen all over the world," Cameron CEO Jack Moore said during the earnings conference call. "We're getting requests in every corner of the world from our customers to support this, and so we have to ramp that up to meet it both with personnel and with infrastructure."
-- Written by Eric Rosenbaum from New York.
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