The Gulf Is About To Open Up: 3 Stocks With Upside

Includes: BP, CLB, RIG
by: The Independent Investor

It's always interesting to look at the outlook of companies in a troubled industry through the actions of insiders. While executives often make acquisitions and buy shares at the top, strong actions in a down market are often important.

BP (NYSE:BP) is the largest offshore operator in the Gulf, and the company has been forced to sell significant assets and raise capital to funds its liabilities from the 2010 spill. Still, while BP has made several significant asset sales in the Gulf to Apache (NYSE:APA), the company has sold very few of its assets in this region. BP has sold significant assets since 2010, the company likely had trouble selling significant Gulf assets with the moratorium in the Gulf making the future of the industry in this region highly uncertain, and management also likely wanted to wait for better prices.

This is why I find the recent tentative agreement between Plains Exploration and Production (NYSE:PXP) and BP for the purchase of nearly $7 billion in assets in the Gulf so interesting. Plains Exploration and Production recently announced that the company was able to borrow nearly twice its $4.6 billion market cap to purchase $7 billion in Gulf assets from BP.

Today drilling in the Gulf is at a three year high, U.S. oil production is at a five year high, and Obama is increasingly talking about natural gas and new drilling more than renewable forms of energy as part of the administration's energy policy. While Republicans have been unwilling to work with Obama since the tea party was elected in 2010, both parties will likely want to show the public they are capable of compromise after the election if the economy remains weak. With divided government the likely outcome of the upcoming election, and Republicans likely to retain the House, drilling should an area where both parties can find common ground.

BP is a nearly $130 billion company that is still the largest operator in the Gulf, and while the company faces ongoing legal uncertainty from the Macando spill and political challenges in Russia, the stock also trades at discount to its North American peers.


BP trades at nearly 8x trailing and average estimates for next years earnings. The company also trades at nearly 1x book value, while Chevron (NYSE:CVX) trades at nearly 2x book value, and Exxon-Mobil (NYSE:XOM) trades at 2.5x book value. BP's dividend is also very conservative, with the company's payout ratio of just 18% well below historical levels of nearly 60%, and significantly lower than the payout ratio of Exxon-Mobil and Chevron as well.

Transocean (NYSE:RIG) is a nearly $16 billion company that is the largest publicly trading deepwater driller, and the stock trades at 1x book value and nearly 10x average earnings estimates for next year.


While Transocean also faces ongoing uncertainty from the 2010 spill, the company recently disclosed that the management is in talks to settle with the Department of Justice for around $2 billion, and management guided to a likely $2 billion settlement last year. The company also had separate liability policies for the spill and rig that partially covered litigation costs. Transocean had its indemnity contract with BP upheld last year, and is likely to reach a fairly favorable settlement with the company.

Core Laboratories (NYSE:CLB) is a nearly $6 billion company that trades at 28x trailing earnings and 22x average estimates for next years earnings.


The company specializes in reservoir management and production, and analysts are projecting the company to grow at over 15% a year over the next five years. Core Laboratories also has strong cash flow, and the company has consistently paid special dividends over the past several years.

To conclude, while the Gulf spill created significant legal and regulatory uncertainty for the energy industry, drilling in the Gulf has increased significantly in the last several months. Elections always create political uncertainty, but divided government is the most likely outcome of the upcoming elections, and offshore drilling should be an area where both parties can compromise. While many companies heavily levered to the Gulf have faced significantly challenges over the past several years, past results are not always indicative of future performance.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.