(Halliburton cement test story updated to reflect contract clauses related to liability in Halliburton-BP contract, and analyst comment)

NEW YORK ( TheStreet) -- Shares of Halliburton ( HAL) dropped by as much as 10% on Thursday afternoon after a presidential commission revealed that tests conducted before the BP Macondo oil spill showed that cement used by Halliburton were liable to create unstable conditions.

The presidential commission said Halliburton did not send any alarm signals to BP, though Halliburton did communicate the results of cement tests. The commission also stressed that BP's full knowledge of the cement problems is still unknown.

The tests support the claim by BP ( BP) that there were several parties at fault for the oil spill, and in particular, BP's claim that it was a "bad cement job," a claim made by former BP CEO Tony Hayward in the BP interim report on the oil spill.


The presidential commission findings don't rule out multiple causes for the oil spill, though they do indicate that proper cement stability should have prevented the deepwater well blowout.

BP shares were rising moderately on Thursday afternoon. Halliburton shares ended the day down 8%, after falling by as much as 10%. Close to 100 million shares of Halliburton were traded on Thursday, almost ten times if 12 million share daily average volume.

There were four Halliburton tests conducted in February and April 2010. In three of the four tests the cement used proved to be unstable. Two of the four tests featured cement that was the exact recipe used by Halliburton for the BP Macondo well. The one set of test results that did show stable cement may not have even been available at the time of the work on the Macondo well.

The government also recently completed testing of samples of Halliburton cement taken from the same mixture used for the BP well. Independent testing show unstable conditions in an environment designed to mimic the BP Macondo well.

Halliburton was expected to respond officially to the federal government's letter on Thursday afternoon.

One industry analyst who was still reviewing the government information said it wasn't a surprise that cement tests have come into focus, as the cementing has been at the center of the oil spill investigation all along. "It's no surprise that a case is being built against Halliburton," the analyst said.

Halliburton posted a copy of its contract with BP for the Gulf of Mexico to the investor relations page of its web site on Thursday afternoon. It was not immediately clear if the BP contract was posted to show that regardless of flaws, Halliburton's liability was limited in the oil spill, though there are lengthy sections on liability and insurance requirements for both contractor and the company requesting the work within the 44 page document.

There are two sections of the BP contract posted by Halliburton of immediate note. One makes clear that the onus was on Halliburton to communicate to BP any deficiencies in its work, but the onus then turned to BP to request any work modifications, after which Halliburton would no longer be held liable.

The contract also makes clear that Halliburton as the contractor would not be held liable for any claims related to pollution "from the reservoir".

Argus Research analyst Phil Weiss said he spoke with Halliburton on Thursday afternoon, and the oil services company said it disagreed with a few items in the government letter.

As far as the contract terms between Halliburton and BP, the most relevant clauses may be clauses 19.6 and 19.7, which indicate Halliburton's legal indemnification. The legal clauses state that Halliburton is not liable for any "blowout" or "uncontrolled well condition" and the terms are irrespective of gross negligence and notwithstanding any breach of duty.

The question for analysts on the Street will now be whether the reaction to the latest twist in the BP oil spill saga is overdone, making Halliburton shares a buy, or whether the revelations about the flawed cement tests require a temporary hold on Halliburton shares due to the inability to quantify risk -- i.e. the shoot first and ask questions later approach sometimes taken with stocks facing exogenous, as opposed to fundamental, risks.

Many on the Street have long been of the opinion that Halliburton is not subject to significant liability, regardless of the cement testing, and that might not change, though it does depend on interpretation of the contract posted by Halliburton to its web site on Thursday afternoon.

-- Written by Eric Rosenbaum from New York.

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