No Rest for Transocean, BP, Halliburton

Jim Brown
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The Deepwater Horizon disaster is the gift that keeps on giving. The State of Texas filed suit against the major parties for damages. The list of entities lining up for their share of the pie seems endless.

The suit alleges the companies and others "engaged in willful and wanton misconduct" for their role in the 2010 spill. The suit names Transocean, BP, Halliburton and Anadarko of violating Texas environmental regulations even though the well was hundreds of miles away from Texas.

The state is seeking money from "lost" tourism revenues, state park entrance fees, concession fees and taxes that would have been paid by the missing tourists. Texas is also seeking civil penalties for each day oil was released into the Gulf, each barrel spilled into the water and compensation for natural resources that were "injured, destroyed or lost." Do you think they missed anything?

The most recent estimate is 4.9 million barrels were spilled but 800,000 were captured by the BP flotilla of ships and should be subtracted from the total according to BP.

Texas joined Florida, Mississippi, Alabama and Louisiana in suing the leading companies in the disaster.

Not to be outdone the City of New York sued BP for "misconduct and fraudulent behavior" linked to the Horizon disaster. NY claims the city pension funds lost $39 million because BP did not disclose the serious risks involved in deepwater drilling. The Comptroller said, "After the spill began, BP misleadingly attempted to minimize the extent of the damage and he cost to shareholders."

BP said the latest total for cleanup, damages, fines and levies is expected to be $42 billion. You have to believe that anyone considering drilling a deepwater well is seriously concerned about the possible liabilities if something goes wrong. Nobody could have anticipated the potential losses before the Horizon disaster. Some analysts believe the total bill to BP could exceed $50 billion and may not be known until the end of the decade because of the vast number of suits.

Halliburton (HAL) announced back in April the company was in "advanced" talks to settle private claims for its part in the disaster. Halliburton shares rose to a new 52-week high on Friday despite the lingering obligations. Halliburton booked another $1 billion pretax charge for private claims but the company could be found liable for billions more once the main liability trial concludes. When the final liability assessment is made by the court you can bet BP is going to be charging after Transocean and Halliburton for reimbursement. If the final penalties are $20 billion and Halliburton is found to be 20% at fault that equates to another $4 billion in liability for HAL. I find it strange for HAL to be at nearly a two year high when the main suit is still in progress.

The mountain of suits has not kept other explorers from pursuing deepwater wells in the Gulf with the exception of BP. That company decided to delay development of Mad Dog Phase 2, citing tough market conditions and rising costs. There are speculations BP could cancel the project entirely or sell it to someone else. BP is the largest producer in the Gulf but the increasing costs of the Horizon disaster and the regulatory requirements they will be forced to undergo if they launch new projects could be a daunting hurdle.

Shell announced it was going to begin development on the Stones project in 9,500 feet of water. The project is thought to have 2.0 billion barrels of oil in place. It will be the deepest development project in the world. It is located 200 miles southwest of New Orleans. Shell's Perdido project is in 8,000 feet of water and began in 2010.

The Stones project is expected to begin production in 2016 and peak at 50,000 bpd in the first phase. Shell will build a Floating Production, Storage and Offloading vessel (FPSO) complete with subsea infrastructure. This is needed because there are on pipelines in the immediate vicinity and running long pipelines in 10,000 feet of water is also an expensive and dangerous task. The oil is piped to the FPSO where it is processed and separated from the gas and water. The oil is then transferred to a tanker for shipment to a refinery. Shell already has seven FPSOs in operation globally. It will be the second in the Gulf with the Petrobras Cascade vessel about 30 miles away. FPSOs can be disconnected from the wells and move out of harm's way in the case of a hurricane.

Baker Hughes said on Friday active rigs were unchanged at 1,769. Oil rigs fell by -4 to 1408. Gas rigs rose by +4 to 354 and slightly above the 18 year low set last week. The peak was 936 in 2011. The total rig count for the same period in 2012 was 1,974.

Iran pulled off another delay last week when it met with the IAEA and the P5+1 UN nations in different meetings and both failed to reach any agreement. It was the 10th meeting for the IAEA and the last five have just had a goal of coming up with a structure for a real meeting. For a year Iran has successfully avoided any real conversation by disagreeing on what would be discussed IF a real meeting was held. The Iranian negotiator said they would be happy to hold further talks with the IAEA in the future but no date was set. I am sure the IAEA is getting tired of the "show talks" when there is nothing being discussed behind closed doors.

There is no way Iran is going to be brought to the negotiating table without the real and credible threat of military action. I don't see that happening in the near future. The U.S. drew a red line in Syria and they stepped over it multiple times with no repercussions. North Korea has been doing it for a decade and finally produced nuclear weapons. Why would Iran not believe they could get away with it as well? Today the U.S. is projecting an image of all bark and no bite.

Crude oil prices closed at $96 for WTI on Friday after U.S. Consumer Sentiment came in at a six-year high of 83.7. Analysts claim the spike in crude prices from the $92 low on Wednesday was due to "expectations for improving demand." I think the analysts were smoking dope. The U.S. economic reports have been almost all negative with only an occasional report that surprises to the upside. The sentiment was one of those reports.

They say markets anticipate conditions six-months in advance. If that is the case we should be staring into the abyss because we will be six-months closer to the end of QE and the end to the liquidity that is powering the rally. Fortunately for investors the economic reality is being ignored and stocks are moving higher. Eventually this trend will end but for now the Fed is filling the punchbowl with a fire hose.

The markets rallied strongly to new highs on Friday as we appeared to enter the euphoria stage of the current move. All sectors surged despite volume being very low for an option expiration Friday. Analysts, including myself, are hesitant to make any directional predictions. The markets have not been this overextended since early 2011 and that was at the end of a six-month rally in late February.

I suggested in the Option Investor commentary this weekend there is a shortage of stock. Investors currently long don't want to sell and there are plenty of investors still trying to get into the market. In theory this is the perfect situation for those currently long. As John Mauldin frequently says, "The market today is a bug in search of a windshield." I call it the headline minefield. There is a headline in our future that will change the outlook in an instant and it will be blamed for triggering a correction. It is like the last block to be removed in a Jinga game. You know, it is the one that makes all the rest collapse. Remain long but watch out for the headline.

Jim Brown

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