The BP (NYSE: BP) accident is far and away the worst disaster to ever befall drilling companies, from both an economic and environmental perspective. Entire industries in the Gulf are on extended hiatus. It goes without saying that after oil leaking continuously into the Gulf for more than two months, natural habitats for fish and other marine life have been ruined. BP, which, prior to the incident was a giant of industry and enjoyed $7 billion revenue streams per quarter, may need to consider bankruptcy. Clearly, the circumstances are special. Never before in the history of the deep sea drilling industry have we seen such a fiasco. But as investors, we need to recognize that special circumstances create special opportunities.
Now, before you label me a greedy, uncaring self-beneficiary, I must say that I do have extreme sympathy for this environmental disaster. I have sympathies for the locals living near the gulf, their businesses, the animals, even BP to some extent. The reality of it is that investors everywhere recognize that situations like this do not happen every year (or even every 20). Everyone is wondering where we go from here.
The most obvious aspect of this situation is that investors believe that if BP manages to cap the spill and stay afloat financially, their shares would be extremely undervalued (or at least at a pretty good bargain by most standards). The only problem with this thought process is an obvious one; the risk of BP filing for bankruptcy. While this may seem unlikely, any investor that has been around a while knows that anything can happen at this point given the enormous amount of claims on BP. It may not head for any of the bankruptcy chapters, but at this point it's too hard to call, and a long position in BP seems like a constant headache.
Dave and I were looking around at other drilling companies last week to see what their charts looked like and to see if we could spot any opportunities. Initially, we were looking at Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO), which do the same thing: deep sea drilling. Much like BP, both companies' shares had been run into the ground. Transocean's more so since it was their drilling rig that blew up. Though legally Transocean is deemed not liable, sentiment tends to be negative when your company name is associated with a disaster of this magnitude.