The Gulf of Mexico Oil Disaster: The Fallout From This Damaging Oil Spill
by Marc Lichtenfeld, Advisory Panelist
Wednesday, May 5, 2010: Issue #1253
As oil from the destroyed rig in the Gulf of Mexico continues to spill into the water, creating an oil slick the size of Delaware, there’s no doubt that the damages are going to be extremely high – both financially and environmentally.
British Petroleum (NYSE: BP), who leased the rig that exploded, has stated that the cleanup efforts are costing $6 million per day. Estimates for the total cost of the cleanup have ranged from $1 billion to $7 billion. And the cost to the fishing industry could be as much as $2.5 billion. Florida tourism could suffer to the tune of $3 billion.
Eventually, the companies responsible for the disaster and their insurance companies will pay the price, too.
While BP has said it will pay all cleanup costs and legitimate insurance claims – which is the right thing to say – it will probably try to either pawn off the responsibility or recover damages from others.
That includes Transocean (NYSE: RIG), the company who owned the rig and Cameron International (NYSE: CAM), whose blowout preventer failed to keep the oil from spilling into the Gulf. For its part, Transocean has insurance for the $560 million rig that sank.
So who is going to actually cough up the money?
The Companies That Will Pay the Price of the Oil Spill
This is going to hurt BP.
Even if the company can show that other firms had a greater responsibility for the accident, whatever BP pays will come out of its own pocket because it self-insures.
As a result, don’t be surprised to see them drag this out in court, despite saying all the right things now.
In terms of compensation to the families of the 11 employees that were killed in the explosion, there’s a precedent from 2005. Back then, BP paid $2 billion to the families of 15 workers that died in an accident.
The families affected today will likely receive a payout – although Transocean could be on the hook, since it employed the workers.
This is where reinsurance is important.
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Reinsurance Reinsurance companies act as insurance to other insurers, offsetting the primary insurance company’s risk and making up for some of their losses. Why do insurance companies do this? Simply put, to spread their risk and lessen the financial blow that would result from a major payout – like the ones that will come from Gulf of Mexico oil spill, for example. In return for their obligation and risk, the reinsurance company takes a portion of the original insurance premium paid to the primary insurer. |
Several reinsurance companies have stated what their own losses could be due to the spill…
- PartnerRe (NYSE: PRE) – $60 million to $70 million.
- Hannover Re (NYSE: HVRRY.PK) – on the hook for $53 million.
- Transatlantic Holdings, a division of AIG (NYSE: AIG), said it’s responsible for $15 million.
However, AIG’s losses aren’t limited to Transatlantic. A spokesman for Cameron International told me that AIG insured Cameron’s general liability for $500 million. It’s not yet clear what AIG’s total exposure is to the disaster.
Matching Sensible Contrarianism With Proper Timing
If you’re looking for a way to play the situation, the simple answer is this: don’t.
Being a contrarian, I started looking at the various companies to see if there are any good investment angles. But it’s way too early to even have a vague idea of how it will all shake out.
However, once some of the costs and liabilities are better understood, we’ll likely see another jolt down for some of these stocks.
Of course, BP is the whipping boy for the disaster. But the reality is that it contracted with Transocean to do the work. I’m not saying that BP isn’t responsible – far from it – merely, that others could ultimately end up paying a higher price.
But the fact that BP self-insures makes any kind of damages especially high. For now, both it and the other stocks probably have further to fall, but I suspect BP will be a potential contrarian pick during the next wave of selling.
And as we’ve preached here time and again, to be successful, you need to have a strong contrarian instinct – but the most successful ones do so when they not only identify viable contrarian opportunities, but synch them up with the right timing, too. At the moment, however, this situation needs more time to play out – hopefully with the best possible outcome for the Gulf states.
Hoping your longs go up and your shorts go down.
Marc Lichtenfeld
Related Investment U Articles:
- The BP Oil Spill… One Year Later
- The Oil Services Industries: Drilling For Values Amid M&A Activity
- How America Can Escape From Oil’s Stranglehold
- Petrobras: The Real Winner From Brazil’s Offshore Oil Boom
- This Oil Driller is on Steroids
13 Responses to “The Gulf of Mexico Oil Disaster: The Fallout From This Damaging Oil Spill”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
The article does not comment on who the working interest partners are in this well that BP is operator of. Who are those owners reported to be?
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Larry,
The owners were reported to be Anadarko Petroleum (NYSE: APC) and Mitsui (Nasdaq: MITSY).
Thank you,
Investment U
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“Right now, however, the legal cap on oil firms’ liability for oil spills is a measly $75 million – not even close to what this effort will cost. That’s why Senator Bill Nelson of Florida, along with Robert Menendez and Frank Lautenberg of New Jersey, have proposed raising it to $10 billion.”
You, like the senators, are playing to the “victim” mentality of the country. BP, just like every other offshore producer, pays a fee for each barrel of oil produced, into a spill fund “managed” by the US government. The fund pays for damages beyond the $75 million cap for each company.
Come on, you can do a little research and provide better commentary than this piece!
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I didn’t know about at. Interesting how these politicians will jump at any occasion to get a vote.
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A way to play the Gulf of Mexico Oil Disaster might be to buy the rails. If the Mississippi is closed how will freight be moved in the country? So, perhaps rails are the answer?
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Wasn’t APC involved with this Rig somehow? Weren’t they the ones maintaining it? I only ask because APC is one of their recommendations and it’s taken a pretty severe hit since.
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Lets hope they won’t nationalize the oil industry. My fear is they will because of this catastrophe.
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Follow up studies of oil spills have repeatedly found that clean up efforts have only increased environmental damage and delayed natural recovery. Crude oil is a natural organic substance. The volatile components largely evaporate within a few days and much of the heavier residue is broken down by microbial action over a few months. The heaviest residue accumulates sediment particles and sinks to the bottom where it mixes with further sediment and ends up no more harmful than pieces of the bitumen used for roads.
Use of dispersants result in a toxic sludge which mixes into the water column where it is far more damaging to marine life than if left to naturally degrade while floating on the surface. Their only real purpose is cosmetic and PR at the expense of the environment.
The popular image of dead and dying birds and mammals covered in sticky oil is a relatively brief event and as sad as it may be at the time, their populations soon recover.
In the First Persian Gulf War in 1991, the largest oil spill ever occurred when 6-8 million tonnes was dumped into an area of shallow water and reefs. With a thousand oil well fires to contend with, no effort was made to do anything about the marine spill. Follow-up studies found that within 4 months most of the oil had been degraded naturally and within 4 years even the most heavily affected areas had largely or completely recovered.
A major blowout like the current one is a disaster for all of the companies involved and they do everything possible to prevent it. Imposing giant fines and huge costs for a useless cleanup charade is beyond stupid. This only adds huge increases to production costs which ultimately have to be paid by the end consumer. In the end, the only one really being penalized is ourselves
All the phony righteousness and hand wringing is disgusting. Either get over it and leave the industry to deal with it or decide to live with less oil and all that this would mean.
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At this point I start questionning if the Horizon disaster was an accident or a human sabotage…Really, nobody seems to notice how all the dominoes start to fall in the right place for that guy from the White House?…And nobody seems to remember his icon who’s trying to copy was the criminal F.D. Roosvelt, who by hyding known information about impending attack on Pearl Harbor, signed the dead sentence of over 2000 American sailors and marines, and lately of many other Americans by engaging USA in WWII?…
At least to me the symilarities are shocking!
I hope this time will have to wait less than 50 years to find the truth, because I’m convinced in this disaster not technology is to blame…
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Me again! If you really think the technology for drilling in deep waters was the cause of this desaster then ask yourselfs why none of deep water drilling rigs didn’t explode offshore Brazillian coast when they found their oil riches in Tupi and Carioca fields!And those were deeper – 8000 feet of water not only 5000 like Horizon, and they have a much, much, bigger temperature and pressure…
Or why were no explosions on deep water rigs out of Angola coast, or Norway coast?…
For God’s sake start thinking yourselfs!…
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Mario,
You need to adjust your tin foil hat. Maybe those other rigs didn’t explode because the proper safety measures were instituted or the blowout preventer actually worked.
The conspiracy angle is the stupidest thing I’ve ever heard. Why would Obama want a huge ecological (yes Walter it is a disaster, it doesn’t just evaporate) and financial disaster just days after he said he supported offshore drilling. The conspiracy theory makes ore sense if he said he was opposed to it. Then he can say, see, I told you so. But now he has egg on his face.
And while mentioning conspiracies, interesting that you mention FDR, but not W who allowed 9/11 to happen so that he could start a war that had nothing to do with terrorism, in order to impress his daddy.
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Mario, your lack of spelling ability makes it hard for us to “start thinking yourselfs!”
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Maybe this BP off-shore oil leak will knock some sense into the heads of mis-informed people who have been howling about how bad the oil sands in Canada are.
The fact is that the worst possible accident at Canada’s oil sands would be a drop in the bucket compared to the current BP oil leak.
As for long term impacts of the oil sands, there are none. I have seen depleted oil sands lands reclaimed and put back to their original natural state. The reclaimed land is exactly the same as areas that were never mined, complete with local wild life, plants, weeds, marshes, insects, etc.
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