7/13/10: Same Old Moratorium

Yesterday I hosted the second live, subscriber-only chat, overcoming some early technical difficulties related to a series of thunderstorms passing through the Washington, DC area. This week’s session proved even more popular than our inaugural June 25 chat, attracting nearly 200 participants at one point.

For readers who weren’t able to attend, the two-hour session is archived here. I’ll be scheduling another online chat over the next few weeks; subscribers will be notified of the date and time via email.

These periodic online discussions are designed to answer subscribers’ questions about energy-related topics. But the sessions also provide valuable information about what topics interest readers and require additional coverage in The Energy Strategist.

One issue that surfaced on several times during yesterday’s session was the idea that the courts have lifted the Obama administration’s moratorium on drilling in the Gulf of Mexico. A handful of subscribers asked if the removal of the ban would prompt me to change my recommendation to short Diamond Offshore (NYSE: DO), a play outlined in the most recent issue of TES.

The answer is an unequivocal “No.”

In last week’s issue, I noted that the court’s ruling isn’t likely to change the basic situation in the Gulf and that firms operating in the region have made moves which suggest that the moratorium could remain more or less in effect for far longer than six months.

Secretary of the Interior Ken Salazar unveiled a new drilling policy designed to address some of the issues Judge Feldman pointed out in his original ruling. The new moratorium is similar to the original ban and, arguably, slightly worse for the industry.

The original moratorium prohibited drilling in waters more than 500 feet deep. Although the new ban doesn’t mention depth, it does ban drilling that involves the use of subsea blowout preventers (BOP) or BOPs installed on floating production platforms. All deepwater wells are drilled with floating production platforms and use subsea BOPs; the new policy is still a blanket ban on deepwater drilling.

Even worse, some shallow-water wells are drilled with floating rigs; the ban will affect, on the margin, a handful of shallow-water developments. The only real difference between the original ban and the new policy is that the government appears to offer a bit more explanation and justification for the policy.

The new moratorium extends through the end of November but allows for new drilling before that time, if operators can prove they’ve addressed safety issues.

This back and forth is basically meaningless. No one doubts that the ban ultimately will be extended, pending the government’s investigation of safety practices; regulators are unlikely to conclude that drilling is safe before the moratorium expires.

Oil and gas firms undoubtedly will challenge the new policy in the courts. Because the “new” moratorium bears such a strong resemblance to its predecessor, I don’t know why the court would rule differently this time around. Then again, I’m not a lawyer; I’m sure there are plenty of arguments to be made.

Legal and political theater aside, the impact on the contract-drilling industry is the same.

Diamond Offshore announced that it’s moving a second rig out of the US Gulf of Mexico. “Ocean Confidence” had been under contract with Murphy Oil Corp (NYSE: MUR) for a day rate of $510,000 through mid-February 2012. The rig is now en route to the Republic of Congo where it will work for the same operator. The deal also involves an additional one-year commitment in the Gulf of Mexico, once Murphy is able to obtain permits and meet safety regulations.

The entire deal, including the contract in the Congo and the Gulf of Mexico extension, is worth a maximum of $234 million. Consider that the original agreement would have been worth closer to $300 million, and that sum would have been contractually guaranteed. The new deal is clearly inferior; Ocean Confidence would have been unable to command a higher day rate in the open market.

I continue to recommend that investors short Diamond Offshore above 60.

Big Oils

Exxon Mobil Corp’s (NYSE: XOM) acquisition of Portfolio holding XTO Energy closed at the end of June. XTO’s shareholders should have received 0.7098 shares of Exxon for each share of the acquired company.

Exxon Mobil’s stock has been weak in recent months, a product of trends in the broader market and fear that the company might acquire BP (NYSE: BP) and inherit its liabilities. These fears are overblown; Exxon Mobile looks like a good value at current prices. Exxon Mobile will replace XTO Energy in the model Portfolios as a buy under 65.

The next issue of The Energy Strategist will include a detailed analysis of the integrated oil companies and advice on how to play the group.

 

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