Tuesday, July 13, 2010

Rig Risk

Until the accident at the Macondo deep-water oil well, safety was apparently not a priority topic for BP (BP: NYSE) or any of the other off-shore oil drillers. Rig risk appears to have had an entirely different connotation “Macondo BC” versus “Macondo AD.” Even though the states ringing the Gulf are crying out that the oil industry is as vital for their well being as fishing, it is clear there has been a seismic shift in thinking about off-shore drilling. To wit, conservative pundits and politicians have stopped their chant “drill baby drill.” “Safety baby safety” is the new mantra.

Investing in pervasive long-term trends has worked well in the small cap sector, since paradigm shifts in demand can impact smaller companies in the right positions with greater force than larger companies. Furthermore, small operations with the right technology or product are often better able to meet some new demand source than are larger, less responsive companies.

There are a number of companies that offer oil spill equipment. It is tough to get them on the phone these days, because most of them are busy filling orders from BP, which seems to have every oil containment boom already deployed. Oil Spill Response (fire brigade services), Ayles Fernie International (dispersant), and Vikoma International (oil and chemical spill control, sea booms) are BP suppliers. Not surprising they are all UK-based operations. The U.S. has its own clean-up equipment suppliers. GeoTechnical Supply, Inc. sell oil containment booms and NPS Corp. offers its “Spilfyte” spill kits.

Unfortunately, for most investors, these companies are all privately held and therefore inaccessible as investment opportunities. We looked at several of the public off-shore oil industry suppliers: Helix Energy Solutions Group, Inc. (HLX: NSYE) (reservoir development services), Global Industries Ltd. (GLBL: Nasdaq) (platform installation and removal, pipelaying), Tetra Technologies, Inc. (TTI: NYSE) (well plugging and abandonment), Cal Dive International, Inc. (DVR: NYSE) (pipelaying, platform installation and salvage), Oceaneering International, Inc. (OII: NYSE) (engineering services), and Dril-Quip, Inc. (DRQ: NYSE) (wellheads and subsea control systems). All provide one service or another for the off-shore oil industry from well drilling to decommissioning.

Not one of these oil and gas industry suppliers and service providers describe safety or clean-up solutions are on their product/service lines.

Apparently, safety and clean-up has never offered enough revenue potential to attract larger operators or to allow the build up of size. We are going out on a limb here to say that when will change in the coming months. It would not be a surprise to see these public players adding to product and service lines by acquiring some of the private players.

Next post, we will look at valuation of the off-shore oil industry suppliers as BP struggles with its latest “fix” to stem the flow of oil from the broken Macondo well. One company in the group with a bird’s eye view on safety and risk mitigation in off-shore oil and gas is Cameron International Corp. (CAM: NYSE), which fabricated the most recent “capping stack” for the Macondo well. Cameron designed then tested the cap in their Houston plant and BP began testing today at the well site. Keep your fingers cross that BP’s “rig risk” has finally been mitigated.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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