BP Oil Disaster: A Year Later

The World

On the one-year anniversary of the BP blowout disaster in the Gulf of Mexico, it's natural to ask ask how far we have come in our understanding of deepwater drilling, what steps have been taken to prevent another accident and where the opportunities might be as we move forward. It's been an interesting road from where we were 12 months ago. As the Macondo well blowout disaster played out through the summer of 2010, it was incredible to see the overwhelming media focus and the way that those images of that spewing pipe at the bottom of the Gulf of Mexico affected everyone, not just the capital markets. The event caused a massive swoon in both stock and commodity prices and enormous worry about the extent of the environmental disaster.

Both of these potential catastrophes have been blunted by time. The stock markets have recovered strongly, posting gains of almost 300 S&P points since the blowout-inspired lows of July 2010, while the environmental damage, although significant, has clearly not materialized into the widespread poisoning of the Gulf that many environmentalists worried was possible. And how did deepwater drilling fare as a continuing source of our crude and natural gas reserves? The recoiling from deepwater technology was never going to be anything more than a visceral response. That's because fully 25% of our domestic supply of crude oil is obtained through offshore drilling in the Gulf of Mexico, far too much to consider seriously for elimination. The Obama administration has been slow, however, in approving new drill rigs with only six new permits approved since the blowout. Although it's been faulted for its relative inaction from a bipartisan chorus including the American Petroleum Institute and former President Clinton, it made a credible response when it reorganized the Mineral Management Service, giving it a new name and a new leader in Michael Bromwich. The new focus has been to respond more quickly and fully to accidents as they happen, implying that prevention may not be as easy to fix. Indeed, the push for better blowout preventers that actually will prevent blowouts, better safety practice education of rig workers and cementing standards among other issues have been set as much longer-term goals, with a focus to restart drilling activity in the Gulf sooner rather than later. There is no choice. Besides being a significant source of domestic energy, fully 30,000 now idle jobs rely upon deepwater drilling along the Gulf coast. With a limited number of platforms and companies equipped to use them, whatever work we choose to forego in the Gulf will find its way off the coast of Brazil, or Western Africa or Australia or Vietnam.

So how to invest? The largest company delivering containment services to the drilling industry is Superior Energy Services, which has been beating away business with a stick since the focus has been less on permitting and more on containment and will continue to do so. Inside the drilling space, the one company that has not participated as strongly in the market rebound besides the partner of BP on Macondo, Transocean, has been Diamond Offshore. Among the offshore drillers, DO has so underperformed the sector while avoiding RIG's reputational risk from the Macondo blowout that I consider it by far the best value in the space. The bottom line is that nothing can really stop the march for more and deeper wells. A year after the BP spill, the question for investors is not whether drilling will continue, but which ones hold the deepest values. As long-term investments, these service providers must pay off.

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