Buy The Spill?

It's hard not to read the coverage of the oil spill in the Gulf and not start wondering whether some selective vulture capitalism could pay off here.

Everyone involved - BP (BP), Anadarko (APC), Transocean (RIG), Halliburton (HAL), and Cameron (CAM) - has taken a pummeling from the accident. It's difficult to imagine, though, that the damage is ultimately going to be as bad as the declines in the market caps all suggest.

RIG and CAM, in particular, are the names I'm looking at right now. BP is a fine producer and the decline in the stock in the wake of the blowout and rig sinking has certainly put the stock at a point where I think long-term investors will come out nicely. But BP just isn't the type of stock I normally play.

The real question here is a two-parter. First, what will the final sum be for the cleanup costs, legal fees, and settlements? This is a big spill and it was going to be expensive in its own right to clean up. Now with lawyers descending on the Gulf coast like locusts on a corn field, the odds that all involved will be in court for years have to be close to 100%.

The second part is how the expenses get apportioned between the players.

BP has publicly stated that it wasn't their people on the rig or operating the drilling. That's true ... but also irrelevant. Most drilling contracts specifically provide that the leaseholders (BP and Anadarko) are responsible for any accidents unless those accidents can be shown to be the result of "gross negligence" on the part of the driller. So, RIG is going to be on the hook for the rig itself and some related contamination expenses (diesel, etc.). On top of that, the rig was insured for about $560M, and the company carries $950M in third-party liability coverage.

Cameron was the company that made the BOP (blowout preventer), and that piece of equipment is going to get a lot of attention. Generally speaking, a BOP is supposed to prevent exactly what happened on the Deepwater Horizon, but for whatever reason it didn't. I've seen some sources indicate that the BOP was beyond its guaranteed/warrantied life, and it is at least possible that the device wasn't properly tested and maintained. In any case, CAM has a $500M liability policy to deal with cases like this. The bigger risk, though, is that if the BOP is deemed at fault (and badly made), CAM could lose a lot of share to NOV and other rivals.

Last and not least, I wonder about Halliburton. HAL was doing the cementing just prior to the blowout. Did something about that procedure trigger the explosion? In any case, HAL usually has contracts in place that indemnify them or at least limit the liability in cases like this.

All in all, it's a big mess and it's going to take months (if not years) to fully lay out the blame. In the meantime, BP is a pretty cheap stock at these levels. I'd actually prefer Apache (APA) myself, though, as it has taken a few hits along the process of this accident. I have to say I'm very intrigued by Transocean and Cameron at this levels; I've liked both stocks for a long time, but have held off because of valuations. It seems extremely unlikely that either RIG or CAM is going to have a big bill to pay as a result of this accident, and so long as neither company's products or actions are targeted as being the direct cause, the stocks should recover pretty nicely in the long run.