Thursday, May 6, 2010

The Oil Spill: Disasters and Opportunities

I find it uncomfortable to advise investors on how to make a profit in the aftermath of a tragedy. And the drama unfolding in the Gulf of Mexico is rapidly developing into just that sort of situation.

It has already led me to provide one alert – "Expect Transocean to Keep Going Down" (April 30) – pointing out a profit opportunity. But Transocean is hardly the only company to feel the heat from this widening disaster.

There are more opportunities emerging for the average investor, and I’ll be providing some of them in a minute. However, first, we need to put this in its proper context.

The sinking of the Deepwater Horizon platform off the Louisiana coast has been, foremost, a human tragedy, with 11 dead. Round two is an environmental disaster, as a huge swath of ecologically sensitive coastline awaits the onslaught of the widening oil slick.

This disaster has single-handedly derailed an energy bill on Capitol Hill… prompted every governor considering offshore drilling to do an abrupt about-face… and revised how both public opinion and the market will look at oil production for years to come.

In the Aftermath of the Spill, Three Investment Plays Gain Considerable Upside Potential

In addition to Transocean Ltd. (NYSE:RIG), the owner of the rig, two other companies are certain to be answering to a rising number of lawsuits and feeling intense political heat: BP plc (NYSE:BP), the operator, and Halliburton Co.(NYSE:HAL).

Halliburton is coming under fire because of suspect well-cementing, which some analysts are suggesting is the cause of the initial explosion and fire. Transocean continues to have less of a market support system than either BP or Halliburton. That means, as these three companies move squarely into the crosshairs of multiple lawsuits, Transocean will remain the most exposed.

For the investor, however, the aftermath of the spill is providing three separate plays to participate in significant upside investment movement. Each of these segments will find share prices benefiting, both from the clean-up of the oil spill and from the obligation we now have to re-evaluate how we extract oil.

First up are the immediate beneficiaries. While crews fight off the oil slick, and BP decides how to cap the ruptured wellhead more than a mile down, several companies will receive increased attention.

Nalco Holding Co. (NYSE:NLC) is already providing BP with chemical dispersant to use on the slick. Expect this specialized service chemical company to obtain increasing orders from both the operating company and the coastal areas under siege.

Other beneficiaries, short term, will be Baker Hughes Inc. (NYSE:BHI) and Shaw Group Inc. (NYSE:SHAW). Both will be called upon for much of the engineering, design, pipeline, and infrastructure development needed for any move to cap the underwater gusher.

Unlike the exploits of the famous oil firefighter Red Adair, nobody has ever attempted what needs to be done to cap this well. Since there is no immediate fix for this rupture or the widening slick, the services of such companies will be extensive and ongoing .

The second play will provide a useful offset strategy moving forward. The overall effect on investment in the energy sector will undoubtedly end up emphasizing the environmental impact of both onshore and offshore drilling. That, in turn, will bring into play a wide range of environmental service companies.

The most direct way to balance the entire sector is to use the Market Vectors Environmental Services ETF (NYSE:EVX). This exchange-traded fund attempts to reproduce – at least before fees and expenses – the price and yield performance of the NYSE Arca Environmental Services Index (AMEX:^AXENV). AXENV, in turn, is a modified equal dollar-weighted index comprising 21 companies, all included in EVX. Nalco and Shaw are two of those companies.

The third play comes from a number of opportunities developing with companies that will benefit medium- to long-term from the changes in strategy dictated by the Gulf spill.

Rentech Inc. (AMEX:RTK) is one of two stocks I am targeting in this third category, but it is another entry on both EVX and AXENV, as well. Rentech is a developing small-cap leader in synthetic fuels and delivery, as well as a rising mover in the eco-friendly world of alternative energy.

My final suggestion comes from the other end of the spectrum. McDermott International Inc. (NYSE:MDR) is a major multi-billion fabricator of offshore platforms, delivery systems, and support infrastructure. It is a primary competitor of Transocean in Asia, Latin America, the Persian Gulf, and the Gulf of Mexico.

Offshore drilling is certainly coming under pressure from U.S. authorities, and we should not expect any major new drilling activity anywhere near the continental shelf for some time. But such drilling will continue elsewhere. Transocean’s Deepwater Horizon problems will translate into increasing leverage for competitors such as McDermott

by Kent Moors Ph.D. · May 5th, 2010

http://oilandenergyinvestor.com/




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