Oil company buyers and sellers in the deepwater Gulf of Mexico after BP

06/24/2010 4:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

$20 billion is a chunk of change even for BP (BP).

You can bet that a lot of oil company CEOs are trying to figure out if they can afford to keep drilling in the Gulf of Mexico (whenever that’s possible again.)

If the $20 billion fund that BP has agreed to put aside for the Deepwater Horizon disaster is the new size of an oil company’s potential minimum liability for a spill in the Gulf, you can bet that a lot of those CEOs are going to decide they can’t play.

And that becomes even more likely now that insurers are cutting back on their coverage for spills in Gulf waters. In written testimony John Lloyd, chief executive of Lloyd & Partners, told the U.S. Senate on May 11 that available insurance coverage could drop by as much as 30%. Premiums have already climbed by 50% for deep water rigs.

That’s likely to leave some oil companies faced with an alternative of coughing up extra cash for insurance (if they can get it), self-insuring (if they can afford it), or selling out of drilling leases and projects (if they can find a buyer).

But there will be winners from these decisions.

Oil companies with deep pockets—deep enough to pay higher premiums or to self-insure—and who have confidence (justified, we all hope) in their ability to drill without disaster will be looking at a buyers’ market in deepwater Gulf of Mexico leases over the next few years. Prices are likely to fall enough—after all there will be lots of sellers and relatively few potential buyers—that even after higher insurance and regulatory costs these leases will be selling at bargain prices.

Companies that fit my description include Chevron (CVX), ExxonMobil (XOM) Royal Dutch Shell (RDS), and possibly Apache (APA).

Chevron and Royal Dutch already have a major presence in the Gulf with Chevron’s Tahiti and Blind Faith and Shell’s Perdido and Mars projects. Apache has recently agreed to a deal to buy Mariner Energy (ME) and its deepwater projects.

Smaller companies—potential sellers--with deepwater rigs include Devon Energy (DVN), Marathon Oil (MRO), Newfield Exploration (NFX), Nexen (NXY), and Noble Energy (NBL).

The speed with which smaller producers decide to exit the Gulf will be influenced by the success of Anadarko Petroleum (APC), a 25% partner with BP in the Macondo well that is the sight of the Deepwater Horizon blowout, in passing all the cost to BP. Anadarko is on the hook for 25% of the costs (with another 10% allocated to Macondo partner Mitsui) unless BP is found guilty of gross negligence in running the drilling program. Anadarko hasn’t yet filed suit against BP, but the company has made no secret of its belief that BP was grossly negligent or of its intention to bring legal action.

A successful suit would make it much more attractive to smaller companies to sell a majority interest to bigger deep-pocket partners (while retaining a minority stake) rather than exiting completely.

Investors know that the Deepwater Horizon disaster will reshape the energy industry in the Gulf of Mexico. We just don’t know exactly how yet.

With this post I’m adding Chevron to my Jim’s Watch List.

Full disclosure: I don’t own shares of any company mentioned in this post.

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