The BP Oil Spill Effect

The Gulf Effect

Tourism: Hotels and Casino’s

The oil spill will negatively impact many tourist and entertainment-related companies operating in the Gulf of Mexico. Of the five US states in the Gulf including Texas, Florida, Louisiana, Mississippi, and Alabama, Florida is projected to suffer the most. Tourism expenditures in these five states is upward $100 billion and employs more than 1 million residents in the Gulf Region. Hotels within 10 miles of the coast in this region, which comprise 1,756 properties with 156,400 guest rooms, have experienced a drop in reservations, occupancy and average daily rates.  Despite the uptick in business in the hotel and casino industry earlier this year as the US economy started to improve, these businesses are getting hit by the oil spill disaster in the coastal region. In order to maintain occupancy and tourist attraction, many hotels in the region are aggressively promoting lower rates and deals such as free golf and complementary room nights. This, in turn, could very well leave revenues below 2009 levels, which were already at historic lows. Property Owners and tourism officials estimate reservations are off by 25-30%. BP has promised $15 million a piece for tourism marketing in Alabama, Louisiana and Mississippi. Florida has already received $25 million from BP to promote the message that its beaches remain clean.

Relevant Companies:  ISLE, BYD, and CCL

Shopping and Retail REITS

With fewer tourists traveling to the Gulf, commercial real estate owners will take a hit. Retail spaces will face vacancies if business owners are unable to pay rent. The loan and mortgage industry is still in recovery and finding a low interest loan to maintain properties is extremely difficult. The debt levels for REITS are at its highs with high unemployment, falling property values and declines in cash flow. Overall the effect of the oil spill on tourism and property value will only continue to hurt the lagging REIT sector as there will be more vacancies and falling rental rate in areas such as shopping centers and casino resorts. Another thing to consider with REITS in the Gulf region is the fact that investors will be less inclined to invest in property with close proximity to an existing or potential environmental disaster.

Relevant Companies:  LEN, JOE, REG, and EGP

Exploration & Production

Many major oil and gas names operate offshore drilling operations in both the shallow and deep waters of the Gulf of Mexico, a region that has several proved oil reserves.  Currently, the Obama administration has imposed a six month ban on deep water drilling as well as a new set of rules that will serve to delay exploration projects in shallower depths.  The administration claims that these regulations are necessary to implement new safeguards and designed to prevent a repeat of the Deepwater Horizon disaster.  These rules have come under heavy fire from oil & gas companies this week as state and local governments who claim that many jobs will be lost in a region that has already been economically battered by the oil spill.  Louisiana Senator Mary Landrieu said “The shallow-water drilling delays and continued ban on deeper exploration could be devastating to energy companies, onshore suppliers, and workers in the Gulf Coast.  In response, Interior Secretary Ken Salazar responded by stating “The jobs are a concern to us…but the top priority is ensuring that offshore drilling is safe.”  Given the uncertainty surrounding the legislation as well as the cleanup effort, several oil & gas companies with large operations in the region are likely to suffer for months if not years to come.  Instead of seeking investment opportunities in these names, the best play in this space may come from companies that have limited exposure to the Gulf Coast region.  There are several of these stocks that have been beaten down in the wake of the BP crisis and have settled at relatively cheap prices.  In the long run, these companies may benefit from investors seeking to put money to work in the energy space but do not want to risk exposure to further exogenous events impacting the Gulf Coast Region.

InterOil Corporation (IOC) is primarily involved in the exploration and production of oil & gas properties in Papua New Guinea holding leases for approximately 4.7 million acres.  The company is fully integrated, with operations ranging from drilling operations to retail.  Furthermore, the company owns and operates an oil refinery capable of processing 36,000 barrels per day.

Petrobras Energia SA (PZE) is a global exploration and production company operating in Argentina, Bolivia, Ecuador, Peru, and Venezuela.  The company also owns and operates refineries that produce gasoline, diesel oil, fuel oil, asphalts, and asphalt specialties.  Furthermore, the company is involved in the production of several petrochemicals used in a variety of industrial applications.  The company has a production capacity of 1,978,000 barrels of crude oil per day as well as 422,000 barrels of natural gas.  Petrobras has been expanding into the alternative fuel space and operates 5 biofuel plants, 10 thermoelectric plans, and one wind energy project.  The Brazilian government is the primary shareholder in Petrobras. 

Brigham Exploration Company (BEXP) is an independent exploration, development, and production company that specializes in domestic onshore drilling.  The company operates drilling operations in the Rocky Mountains, the Gulf Coast (onshore), the Anadarko Basin, and in West Texas.  The company’s primary customers include intrastate pipeline purchasers, operators of processing plants, and marketing companies.  The company employs a lean, experienced team of 11 geologists, 6 geophysicists, 2 computer applications specialists and 5 geological technicians who employ a specialized exploration method.  The company plans to spend $183 million on drilling 60 wells in 2010 to expand their operations.

Relevant Companies:  IOC, PZE, BEXP

Shippers

Shipping could also be threatened if the oil drifts in the way of shipping lanes. The oil won’t damage ocean-going vessels, but it will cling to their hulls, and it is illegal for ships to enter U.S. ports or waterways if they will contaminate the waters. Incoming dirty ships will have to transfer their cargo or be cleaned, which takes time, and cleaning the ships could create delays and port congestion. The entire Mississippi River system, a critical transportation route for the economy of the U.S. heartland--will feel the impact if delays result from the need to clean oil off of ships.

The ports that are most susceptible to the spill are the Louisiana Offshore Oil Port (LOOP), major ports at Pascagoula, Mississippi and Mobile, Alabama, and the Port of New Orleans.

As of June 2, 2010 ports in Alabama, Mississippi, and West Florida said they have not been affected by the spill and don’t expect an impact on shipping in the future.  The U.S. coast guard has said they will keep traffic flowing but have set up cleaning stations from Louisiana to Florida.  Although they said they expect to keep traffic flowing if they do have to clean ships this will cause shipping prices to increase.  As of now it is reported that only one ship has been clean so far and the it took between 30 minutes to an hour.  If this number increases ships will be forced to move to other ports because of bottlenecking. 

The main products being shipped into the Gulf regions are: Coffee, seventy percent of the coffee shipped to the United States goes through the Port of New Orleans.

Other oil service shippers such as Hornbeck Offshore Shippers (HOS) based in Covington, Louisiana are moving their vessels to foreign waters due to the moratorium.  Hornbeck generates 35% of their revenues from the Gulf of Mexico and are now in jeopardy because of the new restrictions.  Hornbeck said its working capital, credit line and projected cash flow for the rest of the year will be sufficient enough to pay for operating costs, debt and capital expenses.

Relevant Companies:  HOS, TDW, CKH, ISH,

Clean Up

One method being used to help clean up the Oil Spill is to use dispersants.  Dispersants are injected directly into the oil flow at a point close to the main leak.  The dispersants are designed to act like soap and break up the oil in orders to keep it off shore. 

The one company that makes dispersants and BP is using for the clean up is Nalco Holding Co., (NLC).   Nalco is the world’s leading water treatment and process improvement company.    "To date sales related to these dispersants have not had a material financial impact on our company," said Nalco Chairman and CEO Erik Fyrwald. "But it is impossible to predict at this time how long this incident will last or the magnitude of the overall response needed."  

The next company involved in the cleanup is Clean Harbor.  Clean Harbor (CLH) is the leading provider of environmental emergency responses in the U.S. and has been contracted to provide their services throughout the Gulf of Mexico.  Clean Harbors is involved in many aspects of the spill response including containment, removal, disposal and recycling of the recovered oil.  Clean Harbor is expecting its 2Q10 revenues to increase 15 – 20 percent on their initial consensus of 4352.0 million.

Relevant Companies:  NLC, CLH, PG, ASH, EMN, NR, ARJ

Restaurants/Grocery Stores

Among the concerns are cost increases for restaurants, particularly seafood ones, who source their products like shrimp and oysters from the Gulf.  Supply of seafood from the Gulf will be reduced, which will cause prices to go up for restaurants.  70% of the U.S. supply of oysters is from the Gulf; 69% for shrimp; 90% for crawfish.  In total, 2% of U.S. seafood comes from the Gulf.  Restaurants are a $77B industry in the Gulf states.  Concerns over seafood safety may further harm business for restaurants.

Similar to the case for restaurants, as the supply of seafood from the Gulf reduces, prices will increase for grocery stores.  In particular, grocery chains in the Gulf states will be more affected by this reduction in supply.

Relevant Companies:  DRI, MSSR, RUTH; WINN, PUSH.OB

Regional Banks

Several regional banks have expressed that they could potentially be affected by the oil spill.  The moratorium on offshore drilling would lead to job losses, which could negatively impact consumers' ability to pay back loans.  A few banks have specified possible issues they may face on their filings or during conference calls.  They have included notes in their Risk Factors section of the 10Q about the possible effects the oil spill could have on their business and customers.

For instance, MidSouth Bancorp (MSL) noted in their most recent 10Q that the oil spill could " adversely affect customers and their ability to repay borrowings under agreed upon terms, adversely affect the value of the underlying collateral related to their borrowings, and reduce demand for loans."  The company’s exposure to the oil and gas industry aggregates about $108.7M, or 18.9% of total loans.

Hancock Holding Co. (HBHC) also mentioned in their 10Q that they are assessing how the oil spill may impact their customers, stating that it may hurt their earnings, but would not provide further commentary until more is known about the magnitude of the situation.

Relevant Companies:  MSL, HBHC

Drilling Equipment Manufacturers

Manufacturers of drilling gear may benefit as the oil spill will bring about stricter safety regulations.  The rules would cause an increase in sales of equipment to meet new standards, according to an analyst at Pritchard Capital Partners.  Blowout preventers (BOP) are among the most important pieces of safety equipment for offshore drilling rigs.  They are also one of the most expensive pieces of drilling equipment, costing ~10% of the total cost of the vessel, which translates to $40m, according to Quest Offshore Resources Inc.  In light of this fact, the top BOP makers for deep water rigs (based on sales) are Cameron International, National Oilwell Varco, and GE’s Oil & Gas unit.  Less than 10 companies globally manufacture devices for deep water drillers.

Relevant Companies: CAM, NOV