Two Oil Stocks That Will Survive the Spill

06/02/2010 1:00 pm EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of Personal Finance, says the Gulf of Mexico oil spill is a disaster, but some energy companies are likely to get through it relatively unscathed.

The blowout at the deepwater Macondo well in the Gulf of Mexico is a tragedy. Eleven workers died in the initial explosion, and the subsequent spill will have long-lasting and expensive environmental consequences.

But don’t be fooled by the talk about banning offshore exploration: The Macondo disaster won’t spell the end of drilling in the Gulf. Without a credible near-term alternative to oil, a disruption to deepwater production would make the US more reliant on imports.

The resulting pull on supplies would devour spare production capacity, sending oil prices into the stratosphere and putting the still-fragile global economy at risk. Producers are allocating more resources to offshore production out of necessity: The world’s easy-to-produce onshore fields are mature, and output is on the wane.

Deepwater fields are the final frontier of exploration. In fact, 70% of oil discoveries over the past two years have been offshore, and most of the giant fields are in the deep. Drilling in these areas is expensive and technically complex: Global spending on deepwater fields is expected to total $167 billion between 2010 and 2014, up 37% from the prior five-year period.

Every crisis breeds opportunity. Some companies stand to benefit in the wake of the spill, while the sell-off in many stocks touched by the tragedy is overdone.

Growth-oriented investors should consider Anadarko Petroleum (NYSE: APC). Traditionally regarded as a North America-focused gas producer, Anadarko has increased its exposure to exploration prospects in the deepwater Gulf and offshore West Africa.

Prior to the spill, Anadarko was one of the best-performing exploration and production outfits; five of the seven discovery wells the company has drilled in 2010 have proved successful.

The Gulf disaster has overshadowed a stellar first quarter. Anadarko’s total production jumped 14% from a year ago, and management boosted guidance for full-year output. The company will drill over 20 exploratory wells for 2010, offering plenty of potential upside catalysts.

Net of deductibles, Anadarko’s insurance covers more than $160 million of costs associated with the Macondo disaster. Although the bill will likely exceed this amount, the stock has overreacted to the potential earnings hit. Buy Anadarko under $70. (It traded above $42 in Tuesday’s big sell-off of oil-related stocks—Editor.)

The explosion of the decade-old Horizon rig will result in regulations that favor newer rigs with modern equipment. Updating existing equipment represents a cost for contract drillers like Transocean. Seadrill (NYSE: SDRL) boasts the industry’s most modern fleet; 11 of its 14 deepwater rigs were built after 2008 or are still under construction. All but one of these rigs are leased under long-term contracts, providing highly visible cash flows.

It distributes most of its excess cash in dividends. The stock currently yields more than 9%, and its payout could increase significantly over the next 18 months. Seadrill is a Buy under $29. (It closed above $19 Tuesday—Editor.)

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