The explosion and resulting oil spill at BP’s (NYSE:BP) Deepwater Horizon drilling rig in April 2010 helps underscore the dangers involved with new our energy reality. As worldwide oil demand continues to grow, finding new sources of supply have become a paramount mission, leading exploration and production (E&P) firms to drill in deeper and deeper waters off our coasts.
The potential payoffs are huge, with some of the most prolific oil and gas fields being discovered in recent times. However, to drill in these deep waters, drillers must pay more attention to safety than ever. With the number of lawsuits and fines for “rulebreakers” continuing to rise, producers will undoubtedly devote more capital expenditures to dealing with these issues. For investors, one small oil services firm that provides these safety measures could be great portfolio play.
The latest twist in BP’s oil spill aftermath highlights the growing need for safety CAPEX outlays by E&P firms. Last Thursday, U.S. federal Judge Carl Barbier ordered BP to uphold a clause in its contract with rig owner Transocean (NYSE:RIG) that would shield it from compensatory damage claims related to the Deepwater Horizon disaster. While BP will appeal the ruling, the possibility is growing that the energy giant will be on the hook for the entire $42 billion cleanup bill.
However, BP isn’t alone when it comes to big deepwater payouts. Prosecutors in Brazil have charged Chevron (NYSE:CVX) will $10.6 billion in fines stemming from a 3,000-barrel spill off the coast of Rio Janeiro. In addition, the filing will likely include a criminal indictments of various staff, including the CEO of Chevron’s Brazil unit. In China, ConocoPhillips (NYSE:COP) and China National Offshore Oil Corp. (NYSE:CEO) have agreed to pay more than $160 million to fisherman in Bohai Bay. The spill caused more than 3,200 barrels of fluid to leak in the waters off of China’s largest offshore field.
These are big dollar amounts, and the potential for even greater spill liabilities looms on the horizon. Brazil’s government recently enacted tougher new rules that give it more control over the country’s vast oil wealth. In the U.S., the newly created Bureau of Ocean Energy Management & Regulatory Enforcement (which issues drilling permits) has included much stricter provisions for well blowouts and spill containments. Everywhere, from Europe’s North Sea to China’s coast, E&P firms are going to see more such safety-first provisions.
Playing a Potential Winner
With damages continuing to rise and various safety provisions being worked into drilling permits, spending more on blowout prevention and clean up early on, certainly seems prudent for the producers. Deepwater drilling isn’t going away, and the potential for investors to profit from this new regulatory environment is quite juicy.
One firm benefiting abundantly from the new provisions in the Gulf of Mexico is Helix Energy Solutions (NYSE:HLX). The oil services firm’s Fast Response System (HFRS) was critical in helping to clean up BP’s Gulf spill and was recently endorsed by the Bureau of Ocean Energy Management & Regulatory Enforcement as the recommended system.
Helix’s technology is capable of handling well blowouts of around 55,000 barrels of oil a day in water up to 8,000 feet deep. Helix has signed already signed contracts to use its systems with more than 20 E&P firms, which read like a “who’s who” of top Gulf producers. Currently, these include Murphy Oil (NYSE:MUR), BHP Billiton (NYSE:BHP) and ATP Oil & Gas (NASDAQ:ATPG).
As federal regulators continue to require producers to show how they would contain worse-case spills before they get permission to drill, Helix’s products will see growing demand among deepwater drillers.
Shares of Helix currently carry a price-earnings ratio of 28. However, that P/E could seem like a real bargain going forward. Helix is scheduled to report fourth-quarter earnings on Feb. 23, but based on its third-quarter numbers, analysts have continually bumped up their estimates for the firm.
Net income for the oil services stock rose to $46 million, or 43 cents per share, during the third quarter versus $26.2 million for the same quarter in 2010. Since that time, analysts have raised their average estimates for the fourth quarter to 37 cents per share, up from 18 cents. In addition, Helix paid down nearly $75 million worth of gross debt via repurchasing of a portion of its senior unsecured bonds. Plus, a boost in operations have helped Helix generate healthy cash flows during the quarter.
Dwindling debt, greater cash flows and more demand for its products certainly boost Helix’s potential.
However, the biggest endorsement could come from its CEO. Chief Executive Owen E. Kratz made two open market purchases of Helix stock totaling more $997,000 back in August. His average cost basis was around $14.35 a share. That’s still pretty close to today’s share price, despite the improved earnings and strong outlook.
As of this writing, Aaron Levitt doesn’t hold any shares mentioned here.
