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Oil Drilling Stocks: BP Oil Spill Update

From reports of a shallow-water drilling ban to the buzz term de rigueur of the BP oil spill -- force majeure -- there was lots of offshore drilling stock news to digest on Thursday.

(Oil driller stocks story updated for Interior comments on rescinded permits)



) -- While the


(BP) - Get BP p.l.c. Sponsored ADR Report

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




Rowan Companies



Seahawk Drilling


, and the most volatile of the bunch, under-$5 stock

Hercules Offshore



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.

Hercules ended Thursday up 11%, though at a share price of $2.92. Rowan, ENSCO and Seahawk all stayed down at the close of trading on Tuesday, but saw their losses lightened after the

Washington Post

printed the Interior Department's categorical denial.

Either way, the issue of any ban on shallow-water drilling isn't going away. Analysts said on Thursday that among the oil-driller stocks that tanked before recovering on Thursday they will continue to trade up or down on updates to this story, and an update came on early Friday morning.

The Interior Department told the

Wall Street Journal

late on Thursday that there was no moratorium on shallow-water drilling -- however, the new permits that had been issued to Bandon Oil & Gas on Tuesday, as well as one other shallow water driller, had been rescinded.

An Interior spokeswoman told the


that the just-granted permits had been rescinded "out of caution" and "to ensure that new drilling activities are consistent with" new federal safety requirements.

Energy market analysts said on Thursday that it would not be surprising if the Interior Department offered some language that clarifies what got very confused in the back-and-forth in the press on Thursday. Additionally, with the Interior Department in the process of breaking apart its Minerals Management Service, it wouldn't be surprising for the message to get muddled on a day-to-day basis.

However, the Interior Department statement to the


-- it refused to say why it had granted the permits just to rescind them two days later -- only seemed to add to the uncertainty in offshore drilling stocks on Friday morning.

Alan Laws, energy analyst at BMO Capital Markets, said on Thursday that he didn't expect a moratorium on shallow-water drilling, but the federal government would require shallow-water projects to resubmit permits, and that could mean a delay of weeks before the operations can continue. The BMO analyst said that in a situation this volatile, a slight change of language between the Interior and MMS can make a huge difference, and the Interior Department comment to the


late on Thursday seemed to indicate this was the case.

Shares of ENSCO, Seahawk and Hercules had turned positive by Friday morning, even with the energy sector down and the market sentiment negative.

However, shallow-water drillers were still evincing frustration at the lack of a clear message. Randy Stilley, CEO of Seahawk Drilling, told the Journal, "We're getting mixed signals... There's a lot of confusion, and it's not helpful for a regulatory agency to not be clear on what they're doing."

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An Interior Department written statement fell short of clarifying the uncertainty. "There is a six-month moratorium on deepwater drilling. Shallow water drilling may continue as long as oil and gas operations satisfy the environmental and safety requirements

Interior Secretary

Ken Salazar outlined in his report to the President and have exploration plans that meet those requirements."

There are both political and technical reasons why the Interior Department might not put an official moratorium on shallow-water drilling. As has been reported in covering all the problems that BP has encountered, working in the deep sea presents a host of problems that shallow-water rigs would never face -- for one, the fact that human divers can work on any problems in a shallow-water situation; second, blowout preventers are located on rigs; third, shallow water rigs are more often gas rigs, and lower pressure wells, lessening the likelihood of a spill or blowout.

Yet there is a bigger political issue out there than the bad press of issuing a shallow-water permit. When the report that a moratorium on shallow-water drilling had been implemented came out on Thursday, the reaction from politicians and residents of Louisiana, already economically strained by the BP oil spill's impact on fishing and tourism, showed their anger and frustration at yet another major blow to the local economy. This could be a reason why the federal government will deal more delicately with the shallow-water operations than implementing an immediate ban.

The shallow-water uproar wasn't the only key news events for the offshore drilling companies operating in the Gulf of Mexico on Thursday. The new oil-spill buzz term related to drilling contracts,

force majeure

, was also a major market mover.

The political and economic frustration at the state level in Louisiana was evident in the force majeure issue, when

Anadarko Petroleum

(APC) - Get Anadarko Petroleum Corporation Report

invoked what is known as the "force majeure" clause to relieve itself of liability on three out of four rigs in the Gulf of Mexico. The four offshore rig contractors for Anadarko are


(RIG) - Get Transocean Ltd. Report


Diamond Offshore Drilling

(DO) - Get Diamond Offshore Drilling, Inc. Report



(NE) - Get Noble Corporation plc Report





Force majeure relieves a company from liability when it cannot fulfill contractual obligations because of natural and unavoidable catastrophes.

Neither Anadarko nor the oil rig contractors would say who lost which contracts. UBS analyst Angie Sedita put out a note on Thursday saying that Transocean, Diamond and Noble were the losers. Anadarko owns 25% of the BP oil well responsible for the oil spill and Transocean was the rig operator.

Earlier this week,

Cobalt International Energy

invoked the force majeure clause on a Diamond Offshore-owned rig in the Gulf.

The UBS analyst told investors that this was just the tip of the iceberg in terms of the force majeure clause being invoked, now that there is a moratorium on deep-water drilling -- at least, only on deep-water drilling until the Interior Department clarifies the message on shallow water.

BMO analyst Laws said that the beginning of the force majeure moves adds to the general day-to-day uncertainty in the Gulf of Mexico drilling sector, and while Transocean tried to downplay the risk of contract clauses to its business in a call with investors last week, the analyst said that force majeure will play out on a contract-by-contract basis.

"I assume most of the other oil and gas companies will do the same thing Anadarko did this morning," Laws said. However, the analyst said it is impossible to know what that means on an oil rig contract-by-contract basis. Oil and gas companies can invoke force majeure but still be required to pay the entire contract, or pay a standby rate, or pay nothing. "Force majeure doesn't get you out of the contract terms. You maybe have to pay everything or pay nothing, those are the two extremes and both can exist," Laws said.

Overall, analysts expect the uncertainty to continue to defy easy-to-understand trading patterns in these stocks.

"This isn't a baseball game, it's a baseball season. One day you lose, the next you win, and the goal has to be playing .500 ball over the course of a full season," BMO analyst Laws said. For short-term traders, an 18% plummet within a few minutes in shares of Hercules Offshore, followed by a close of trading gain of 11%, could be the length of a "season."

It might also be a good time for executives of the company to buy up shares of their own stock, Laws suggested. For longer-term investors, though, the day-to-day will continue to present the type of news-event triggered offshore drilling stock charts that were in evidence on Thursday afternoon.

"This group of investors tends to react really positively or negatively to news, and day to day there is always the potential for an overshoot," Laws said.

-- Written by Eric Rosenbaum


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