Deepwater Horizon Disaster Just Keeps Getting Worse

I hope it doesn't sound too glib to categorize the latest developments in the Deepwater Horizon disaster as "... and the hits just keep on coming". What was already a bad situation for BP (NYSE: BP), Anadarko (NYSE: APC), Transocean (NYSE: RIG), and Halliburton (NYSE: HAL) just seems to be getting worse and worse.

As of Tuesday evening, it seems pretty clear that BP's efforts to stop the well from pouring even more oil into the well have failed. Making matters worse, the options left to BP are increasingly bad and the odds of success are increasingly long - a kill well has to be positioned with an extreme amount of precision and it will take quite a while to execute the procedure in the best of circumstances.

Making matters still worse (but probably not surprising those who have been watching this unfold), the U.S. government announced a criminal probe after the close. There's a pretty healthy list of laws and statutes that the government can site, including the Clean Water Act and an act designed to protect migratory birds. Now, the likelihood of anybody going to jail is vanishingly small, but the process does open up the possibility of even more financial punishment to the companies involved.

On top of that, a criminal probe gives the government more leverage in punishing the companies involved. In the process of a settlement, the government can reach for terms that otherwise would not likely be on the table in a simple criminal proceedings. As part of this, then, BP could face sanctions and restrictions on its ability to drill in U.S. waters.

It seems like the government is focusing on BP, Transocean, and Halliburton (those are the three companies that the government has told to keep records), but I would not give a free pass to Cameron (NYSE: CAM) or Smith Intl (NYSE: SII) just yet. After all, if and when it turns into a witch-hunt, anything that looks like a witch is going to get caught up in the mess.

I still believe in the long-term validity of the companies caught up in this man-made disaster. If you have a long enough time horizon, this is probably a very good time to buy shares in BP, Halliburton, Transocean, and Cameron. But there's no way of telling whether there's 20% more downside (or even more) as this all rolls out.

It's interesting (to me) to recall that Exxon (NYSE: XOM) shares really didn't fall that much in the wake of Exxon Valdez. In fact, if you look at a chart including a few years before and after the spill, you can't pinpoint the spill just from the stock chart. In contrast, the stocks of the companies involved in Deepwater Horizon have gotten pounded.

Long-term, there's not much that the government can (or will) do that would permanently impair the ability of these companies to prosper from ongoing appreciation in energy prices. If you can stomach the risk of seeing another 10-20% (or more) downside risk from here, these could be good buys today. But given how long this mess is going to drag out, you probably have plenty of time to accumulate the stocks.