Some Oil Stocks Are Oversold

Sweaty hand-wringing over US stocks continues. The S&P fell another 1% and change yesterday.

Of course, leading the market down, yet again, was everyone’s favorite oil stock British Petroleum (BP). Indeed, uncertainty is the order of the day…how big is the spill, when will it be capped, how much will it cost? The company said yesterday it has already spent $1 billion on cleanup.

What about legal issues? There are already 26,000 claims against BP on the docket, including 150 lawsuits.

Add to that, the US attorney general announced his own civil and criminal investigations into the spill. That announcement, along with the weekend failure of “top kill,” bumped BP shares down 15% yesterday.

Since the spill, BP has seen its market cap chopped by $75 billion – one-third of its market value.

President Obama also announced a moratorium on all deep-water drilling projects. The ban, as you might imagine, is not only a dollar short and a day late…but also bad policy.

“Let’s look at the immediate impact on the Gulf of Mexico energy industry,” our energy expert Byron King suggests, “Every drilling project costs in the range of $500,000-$1 million per day. Close down dozens of these projects all at once, and you’ll witness an instant drought of funds in the energy economy. Indeed, it’s an overnight drilling depression.

“That day rate and other overhead cost for a drilling project are not just ‘Monopoly money.’ Each drilling project supplies direct employment to several hundred workers and technical staff, as well as indirect employment to hundreds more in the service industries…

“I expect that we’ll see a slew of players – operators, drilling contractors, service companies and vendors – declaring force majeure in the coming weeks. Some firms will attempt to get out of burdensome clauses that require them to perform and/or pay, during a time when no one can work due to the government moratorium. Typically, however, the drilling contracts provide contractors some protection. It’ll create work for the lawyers – at least the ones who aren’t already busy suing BP.

“It’s plenty bad that the fishing and tourism economy of the Gulf region is hurting because of the BP oil spill. There are entire arcs of personal hardship just from that alone.

“Now we can watch, over the coming weeks and months, as energy workers lose their jobs. This includes engineers who make $150,000 per year, rig workers who take home $75,000, all the way down to dockworkers making $10 per hour loading sacks of cement on flat-back boats. Oh, and the boat owners? They may not make their payments to the bank, either.”

BP is not alone. Transocean, Halliburton and Cameron – each linked to the disaster – fell double digits yesterday. But it didn’t stop there. Offshore drillers with no stake in Deepwater Horizon are getting pummeled, too. The herd fears the moratorium will become politically popular…and, therefore, permanent.

At the end of the day, the sell-off creates a buying opportunity. Oil stocks and oil service stocks are now “way oversold,” maintains Mr. King. “Unless, that is, people are going to give up using oil.”

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning