Transocean 2

By Brad Thomason, CPA


Transocean (RIG) fell again on Friday.  So did the stocks of the other 3 companies most closely involved: British Petroleum (BP), Halliburton (HAL) and Cameron International (CAM).  The indications are that this oil slick is going to be a much bigger problem than was believed even a couple of days ago.

Within a couple of hours of the piece I wrote on Thursday, the Obama administration said that BP would pay for the clean up (i.e. their insurance carriers), and UBS recommended that people sell RIG and replace it with Schlumberger (same basic business, but not associated with this incident).  Since then, the lawsuits have started pouring in, and there are news reports of lawyers flocking to the Gulf Coast to set up command posts.  On the blame game front, Halliburton is starting to get a larger share of the attention (a number of the lawsuits are against them), as questions arise as to whether or not the way they poured the concrete contributed to the problem.  Future offshore drilling has been placed under a moratorium until the industry can demonstrate that they have a plan for keeping this from happening again in the future.

As of right now the oil continues to flow, and the weather conditions the past couple of days have been about as bad they could have been from the containment perspective, speeding the movement of the slick, and hampering attempts to fix the problem.  It appears right now that this is not a problem that is going to reach a fast resolution.

Based on Friday’s estimates, the cleanup is going to run $8B-$10B.  That number is likely to rise as things continue.  But the collective decline in the prices of the four companies referenced above accounts for a decrease in market cap, so far, of about $39B.  BP, being the largest company and the primary participant, makes up the lion’s share (and every additional $1 drop in their stock price means another $3B in market cap reduction).  The market’s reaction seems to be outpacing the real cost of this at present, and I’ll be surprised if that trend reverses tomorrow when trading resumes.

As for the oil slick itself, I suspect most of you feel about this whole thing the way that I do: sick.  In the spirit of full disclosure, I was just down there (Biloxi) on a fishing trip last week.  We saw several of the task force boats go by, headed west toward Louisiana.  This is more than just a news story for me.  It’s a giant mess right in my backyard.

As for the market reaction, it is typical of what often happens at a time like this.  In times of crisis over reaction by market forces can lead to rapid destruction of market value, sometimes doing a lot more economic damage than the precipitating event itself.  Fortunately what usually happens is that other market participants act, over time, to correct the damage done by the initial group.  The ones who flip out lose money.  The ones who keep their heads and put buying pressure on the market once the question marks dissipate, make money.

Investing is about making money, but sometimes there’s more to it than just that.  When a news driven decline occurs there is always a bad event to go along with it.  That’s sort of the definition of bad news.  But don’t make the mistake of thinking that this is a story about making money off of a devastating oil slick.  This is a story about making money off of other investors who are acting foolishly and destroying a lot more than marshland in the process.  Cleaning up financial messes by going into the market after others have wrecked the place is not nearly as difficult as cleaning up the physical mess down on the coast.  But it is the way that markets regulate themselves and ultimately maintain value.

All that said, I hope they get this mess fixed soon.

So again, this is a situation to watch.  The time to act is not now.  There are still too many unknowns, and that will likely remain the case for weeks, if not months.  But it seems like the market is going to go too far, as often happens at times like this.  Which means that prices ought to return to more reasonable values, once cooler heads get back in the game somewhere down the road.

Not too difficult to decide which group you want to be a part of.

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