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.

Transocean Still In The Crosshairs

The hits just keep on coming for deepwater driller Transocean (NYSE: RIG). Today word came out that a gaggle of senators (I believe they're are all senators ... maybe there is a rep or two in the mix) sent a letter to the Attorney General asking him to investigate Transocean's recent  special dividend announcement.

The dividend, about $1 billion in total, was going to be paid in four quarterly installments. According to these business geniuses, they are concerned that the payment of such a dividend could make it difficult to pursue liability claims against Transocean in the future.

Here I would explain the logic of this move ... if there was any.

So much for "innocent until proven guilty", huh? Moreover, these economic geniuses apparently don't realize that Transocean has been cash flow positive for nine straight years and given the dynamics of the energy market and deepwater drilling, I really don't see that reversing any time soon.

I don't know whether or not Transocean has done anything that will stand up as legal liability. And nobody else does either (possibly including Transocean). Maybe Halliburton flubbed the cementing. Maybe Smith's fluids were faulty. Maybe Cameron's blowout preventer was faulty, or maybe the accident was one not anticipated by the design of the device.

That's a lot of "I don't knows" or maybes.

Practically speaking, Transocean is likely going to get stuck for some part of the bill -- whether through proper legal decisions or through political maneuverings aimed at "punishing" these nasty energy companies. Given today's letter, that latter contingency shouldn't be discounted by investors. While there are certainly limits on what the government can do, some of those limits are imposed only at the level of the Supreme Court and that's a long, expensive journey for any company.

Even still, Transocean isn't likely to be bankrupted by this. Short of foolish and criminal negligence (namely, not properly maintaining equipment like the BOP), I just don't see the smoking gun that keeps Transocean on the hook. That doesn't mean, though, that lawyers and politicians won't try sticking it to them in the meantime.

You have to a pretty high threshold for pain to buy today, as the press isn't likely to get better any time soon. Still, though, the stock is trading for a lot less than I believe it's fundamentally worth and those situations always appeal to me.