Obama's Drilling Halt: What's it Mean?

Considerable confusion surrounding the president's new order on Gulf of Mexico drilling, most of it not good for the deepwater drillers.

The President has ordered:

1) a 6-month moratorium on permitting for new offshore oil and gas wells

2) the halting of all deepwater wells. Drilling of existing deepwater wells halted at first available safe horizon

The second part was a surprise to everyone. The issue: how does this affect earnings of deepwater drillers? Answer: it's not clear, especially since we don't know if the moratorium will be extended, but events are unfolding quickly.

Marathon just announced they were abandoing drilling on one of their gulf wells due to the moratorium.

Several events are likely to happen:

1) contracts between operators and deepwater drillers will likely be cancelled or rates will be greatly reduced under "Force Majeure," which frees parties from liability due to an event beyond the control of the parties.

Transocean confirmed this morning that most U.S. gulf rigs they operate will reccieve Force Majeure day rates.

2) some drillers may attempt to move rigs overseas.

3) rates for rigs likely to drop.

Jeffries said in a note that companies like Nabors, Diamond Offshore, Transocean and Esco could see 5 to 15 percent EPS downside in 2010 and 2011.

Because this will not affect shallow water (> 500 feet) permitting, companies like Nabors, and Helmerich & Payne are all trading up today.

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