Don't Fear The 'R' Word... Profit From It

Includes: NOV, OII
by: Oil & Energy Daily

The "R" word… Regulation. It's not something businesses or investors want to hear, but it's necessary. After all, it was lax federal oversight and a culture of arrogance that led to the financial crisis we're still clawing our way back from.

It was those same twin evils that led to the Deepwater Horizon oil spill, which occurred around the same time. But just as financial reform proved to be little more than a slap on the wrist for huge banks that received billions of dollars in bailout money, environmental regulation remains ineffective and virtually inconsequential.

A recent report from the House Natural Resources Committee makes that quite clear. "Three years after the [Gulf] spill, instilling new safety culture in the oil industry remains a challenge," the report said.

Indeed while some progress has been made - total injuries in offshore accidents and well-control issues fell by half - there have still been too many issues.

BP plc (BP) has had 25 environmental violations - nine classified as major - over the past three years. That's as many total violations as the company had from 2007 to 2009, even though it now has fewer Gulf drilling sites. And that's not all. Recent spills by Exxon (XOM) and Chevron (CVX) prove that not enough is being done to safeguard against disaster.

In 2011, one of Exxon's pipelines dumped 63,000 gallons of oil into the Yellowstone River in Montana. And on Good Friday of this year, at least 5,000 barrels of oil spilled from the company's Pegasus pipeline and flooded into a small Arkansas town. The 70-year-old pipeline ruptured again earlier this month, this time in Missouri.

Chevron experienced a spill earlier this spring, as well. In that case, a pipeline in Utah leaked more than 25,000 gallons of diesel fuel into the Willard Bay state park, about 50 miles from Salt Lake City. It was Chevron's third spill in Utah in the last three years, and yet another black eye for a company that, two years ago, was temporarily banned from operating in Brazil for violations there.

These disasters have raised serious concerns about whether or not the United States should welcome the Keystone XL pipeline to stretch from Canada to the Gulf Coast. Especially since the Calgary-based Enbridge (EEP) was responsible for the costliest onshore spill in U.S. history.

That is, in 2010, corrosion and "organizational failures" resulted in 20,000 barrels of oil being released into the state's Kalamazoo River.

And as it happens, TransCanada's (TRP) first line of defense is the same technology that failed to stop the Enbridge spill. But even if it works perfectly, as much as 2% of the pipeline's daily volume could escape from tiny leaks that are hard to detect. That may not sound like much, but even a 1% leak from the Keystone XL would gush as many as 8,300 barrels of oil per day and cause a spill three times the size of the Michigan disaster within a week.

So it's hard to imagine that Keystone and other domestic oil projects will be approved without more stringent safety measures. But don't worry, that's actually a good thing for investors.

Indeed, while oil majors like BP, Exxon and Chevron are forced to pay more to upgrade their operations, smaller niche companies that provide those services will benefit. Here are a few examples…

How to Profit

National-Oilwell Varco (NOV) is the world's top manufacturer of blowout preventers - the pieces of oil-drilling safety equipment that gained infamy during the BP oil spill. So it comes as no surprise that National Oilwell's stock has surged 72% in the past three years. And it's likely to move even higher from here, as new legislation passed since the Deepwater Horizon spill requires two sets of these devices on every oil rig - onshore or off.

In fact, NOV offers such a wide swath of equipment and services, it's often referred to in the industry as "No Other Vendor."

Here's another: Oceaneering International (OII). We told you about this stock back in February. Since then, it's risen about 20%. In fact, it's up nearly 50% over the past year.

What does Oceaneering do? The company manufactures and operates underwater worker robots - remotely operated vehicles (ROVs). These machines, controlled by human operators onboard a floating rig, use sonar and video to relay data back up to the crew. Many are also equipped with arms or even saws to perform inspections and repairs.

With a world-leading fleet that now numbers 289 vehicles, Oceaneering is the dominant player in the ROV segment. With respect to ROVs used to support drilling, the company has an estimated market share of 56% - more than twice that of the second-largest supplier.

And in addition to ROVs, there's also growing demand for Oceaneering's Subsea Products unit, which constructs built-to-order specialty hardware. That includes underwater umbilicals, which use thermoplastic hoses, steel tubes and other tools for underwater inspection, repair and maintenance activities.

Both of these companies benefit from more stringent government drilling regulation, and they'll continue to do so going forward. And there are plenty of other companies out there that will do the same.

Remember, the United States is producing more natural gas and oil than it knows how to use. But hydraulic fracturing and horizontal drilling - the technologies that have made it all possible - are still relatively new.

So there's ample opportunity for companies that don't just problem-solve, but rather prevent major mistakes from being made in the first place. And "the chase" continues.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.