It seems like yesterday BP (NYSE:BP) was in the news every day and the prospect of deepwater drilling being banned indefinitely seemed more than likely. Today, oil prices are back near their ten year high, BP is still in business, and Obama is looking for ways to show presidential leadership on energy issues without offending his base. Essentially, the BP spill changed the conversation more than the dynamic. Today the U.S. still consumes about one-fifth of the world's energy despite having less than 10% of the world's population and less than 2-3% of known oil reserves.
What has changed dramatically over the past couple years is the tone of the Obama administration. After the spill Obama was quick to blame BP after the spill and impose a subsequent moratorium on exploratory wells. However, today, with renewable projects floundering and gas prices high, the prospect of regulating but continuing to drill in the gulf seems more promising. Drilling in the gulf is also an idea Obama can get Republicans to agree with him on.
While oil companies and potential job seekers alike have been waiting for some time for the Gulf to truly open for business again for the energy industry, there have been several important developments over the last couple weeks to suggest that drilling may pick up sooner rather than later.
First, while the story didn't get much attention, the U.S. signed a major new accord with Mexico on February 24th, agreeing to jointly explore and share revenues from the nearly 1.5 million acres that the countries had disputed ownership of for more than a decade. Now, certainly, the new territory may involve some shallow water drilling and could take years to yield significant future production.
Still, the fact that the accord was approved recently and involves areas where deepwater drilling has become the norm is very interesting. Ironically, despite Republican comments about Obama's energy policy or lack thereof, oil production in the U.S. has increased more under Obama than it did under Bush.
The second event that suggests the Gulf may open for drililng sooner rather than later was the federal government's decision to take BP largely gulf-based refinery unit of criminal probation. While it is easy to forget the Texas City refinery fire that actually killed more people than the recent Rig explosion and subsequent spill, the BP refinery incident was a major black eye in the company's saftey record.
The fact that the federal government would take the refinery unit off criminal probation in the middle of settlement discussion over a potential multibillion-dollar fine related to the Macando spill can only be perceived as bullish for the oil sector.
BP could face tens of billions in fines under the Oil and Pollution Act of 1991 which enables the government to fine companies based on the per barrel rate of their spill. With estimates of the amount of oil spilled in the gulf ranging from between 50,000 to as much as 65,000 barrels a day, the feds have a lot of power to seek a huge judgment if they want.
If the Obama adminstration is willing to take BP off of probation for the worst safety violation in the company's or the industry's history in the last ten years prior to the spill, this should be a sign that the Justice Department is not looking to make an example of BP by seeking a huge settlement against the company likely are not looking to get a huge settlement against the company. The fact that some of BP's largest refineries are in the Gulf should be remembered as well.
Finally, the third reason to believe the Gulf will likely open up for drilling is the change in tone of the Obama administration over the past couple months. While, Obama still talks about green energy jobs being the jobs of the future, his administration has now begun talking about the all of the above approach, and mentioning even fossil fuels like natural gas specifically in major presidential addresses. Obama has always officially welcomed the idea of new drilling and further support for natural gas, but his speeches on energy have always focused primarily, if not exclusively, on renewables like solar and wind.
The safest bet on the outcome of the upcoming elections is divided government. While Americans aren't thrilled with the economy, they also are divided in who they hold responsible for where the economy is today. Obama's approval rating moving over 50% for the first time in several years shows this. With Republicans likely to maintain control of the house while Obama is looking more likely to get re-elected, energy seems like a good issues where both sides could compromise.
So, if the gulf does open for drilling, who would benefit most? While, certainly, oil and natural gas producers like Exxon (NYSE:XOM) and Chevron (NYSE:CVX) would benefit significantly, I think the biggest beneficiaries will be oil service companies who have gotten a significant portion of their revenues from this troubled area. Stocks in this sector have also uncharacteristically lagged the price of oil the last several months.
Three companies that I think would benefit the most are Core Laboratories (NYSE:CLB), Superior Energy (NYSE:SPN), and Halliburton (NYSE:HAL). While the Oil Service Index (NYSEARCA:OIH) and S&P 500 (NYSEARCA:SPY) are having great years, these stocks have lagged the major indexes for some time.
Superior Energy is a small but well run company with a market capitalization of around $5 billion. They specialize in deepwater projects and are heavily tied to the gulf. The company currently trades at around 7x consensus 2013 earnings.
Core Laboratories is a similarly small company with a roughly $6 billion market capitalization that specializes in gauging the size of deepwater discoveries and developing extraction strategies for drilling them. Core Laboratories' earnings have held up very well even during down times for the industry, and the company generates enough free cash flow to pay special dividends nearly every year. The last two years they have paid special dividends of between 2-3% a year while maintaining their strong growth.
Finally, Halliburton is also a name that should benefit strong from an increase in drilling in the gulf. While the company is tied to the strugglign domestic natural gas industry, they also are significantly involved in shallow and deepwater drilling in the Gulf. Halliburton gets a significant portion of their revenues overeseas, but they still are a huge player in North America and the Gulf. The company has resolved their liability with BP and is trading today at less than 8x consensus 2012 earnings.
To conclude, renewable energy might be the Left's choice for the future, but it is not going to solve any of America's problems today. While drilling in the Gulf is unlikely to significanlty change the energy picture in the U.S., a renewed push by Obama would show presidential leadership.
Also, with Republican likely to maintain control of the house, drilling should be an area where Obama can get legislation passed. While many companies will likely benefit from an increase in drilling in the Gulf, the oil service companes most heavily levered to this region are likely to see the biggest revenue bumps. With the oil sector already up significantly, the S&P 500 having its best year so far ever, and some stocks like Apple (NASDAQ:AAPL), 35-40%, these companies could offer significant returns above the major indexes if favorable developments in the Gulf continue to occur.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.