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Oil Spill Makes Waves

|Includes: BP p.l.c. (BP), DO, NE, PDE, RIG, SDRLF
The oil spill disaster in the Gulf of Mexico is now showing the first signs of financial impact on the oil industry as a whole. The responsible oil giant, BP, got its long term credit rating downgraded to AA- from AA+ and have bet put under watch for another possible downgrade by Fitch. According to the rating agency, rig owners stands to loose billions after all deep water drilling in the area have been banned.

“The decision to halt deep water drilling appears to be a rushed response to the growing criticism of the federal government and the president’s handling of the response to the oil spill in the Gulf of Mexico.”

Fitch downgraded BP’s long-term senior unsecured credit rating to double-A from double-A-plus and placed the rating on watch negative as the company’s liability for the oil spill in the Gulf of Mexico escalated into billions of dollars and it faced a criminal investigation. The rating agency also warns of substantial impact on rig owners due to the temporary ban on deep water drilling.
“The downgrade of BP’s ratings reflects Fitch’s opinion that risks to both BP’s business and financial profile continue to increase following the Deepwater Horizon accident in the U.S. Gulf of Mexico,” the agency says in a statement.
“The company has so far repeatedly failed to stop the resultant oil leak and has instead reverted to containment methods that are yet to be fully implemented and are subject to potential weather related disruption.”
“An additional factor supporting the downgrade is the 1 June 2010 announcement by U.S. Attorney General, Eric Holder, that both a criminal and civil investigation has opened,” Fitch says.
Credit markets shrugged off the downgrade, and the cost of insuring the company’s bonds remained lower than Wednesday’s close, according to CMAvision. Five-year BP credit default swaps are now at 228.9 basis points, from 259.0 basis points late Wednesday. This is still more than 170 basis points wider than its level at the start of May.

Only The Beginning?
But this might just be the beginning of a series of downgrades in the oil & gas industry, Fitch warns in a special report.
The rig owners that operate in the area stands to loose USD 2,27 billion if the ban on deep water drilling is not lifted within six months.
If the rigs is up and running again within a month, the losses will be limited to 354 million, according to the estimates.

“This report is designed to provide a high-level overview of the impact to the recent announcement by President Barack Obama that all deepwater U.S. Gulf of Mexico (NYSE:GOM) drilling is to be halted. The decision to halt deepwater drilling appears to be a rushed response to the growing criticism of the federal government and the president’s handling of the response to the oil spill in the GOM. As a result, details of the moratorium have yet to emerge from regulators, and correspondingly, all financial metrics reported in this analysis are very high level and tentative. There is considerable uncertainty with regard to both the ultimate length of time that the moratorium will be in place and the impacts on the existing drilling contracts due to the resulting loss of revenue from force majeure clauses being invoked.”

Here’s a copy of the special report on rig companies by Fitch Ratings.


The oil rig operators in the area are:
BP
Diamond Offshore
Ensco
Frontier Drilling AS
Maersk Drilling
Seadrill Ltd.
Stena Drilling






Disclosure: no positions