By Gareth Soloway on June 1st, 2010 11:43am Eastern Time
"Watch out below! It's going to blow!" These are common screams expected to be heard on a rig or oil platform somewhere around the world. However, it seems more and more apparent these are used to describe the drilling stocks themselves. After the Gulf of Mexico oil spill failed to be stopped over the weekend, the drilling stocks as a whole are being pounded. BP plc (NYSE:BP) has taken the brunt of the storm with a massive drop in recent weeks. Even today, the stock is down 12% more. Other drilling stocks taking a major hit are Anadarko Petroleum Corporation (NYSE:APC) down 15%, Transocean LTD (NYSE:RIG) down 8% and Halliburton Company (NYSE:HAL) down 10%.
The problem with these drillers is the same problem we had with nuclear energy. No one wants it in their back yard. Should a spill occur, we now see the results in the Gulf of Mexico. The economic impact is severe and the harm to the wildlife is extremely saddening.
In any case, the fear here is that drilling in many places will now be halted like it is in the Gulf of Mexico. While I agree this may be a short term issue, I believe as soon as gas prices go north of $3.00 per gallon, people will forget the impact and trust that government safety oversight. These companies will find other areas to drill in and rebound strongly.
BP is responsible and will be the fall “guy” as it should be. Lawsuits will come and there will be problems for years. However, stocks like Halliburton and Anadarko Petroleum could be looked at as having a great risk to reward ratio. These stocks are currently trading well off their 2010 highs. Halliburton traded as high as $35.22 just a month ago. It hit $22.27 today. That is a drop of 37%. In addition, Anadarko traded as high as $75.07 a month ago and today hit a low of $43.63. That is a drop of almost 42%. These do seem overdone in the short run and can be looked at as value plays at these levels.
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Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
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