BP Oil Spill Seen Casting Long Shadow Over Oil Services Profits

By Jason Womack Of DOW JONES NEWSWIRES HOUSTON (Dow Jones)--The final days of a massive U.S. Gulf of Mexico oil spill seem close at hand, prompting optimism for investors in oil-field service companies that took a major hit at the beginning of the Deepwater Horizon incident. But these companies are bracing for a tough second half of the year and perhaps more, as a drilling moratorium has clamped down on activity in the area. The stocks of offshore drillers with operations in the Gulf, such as Noble Corp. (NE) and Diamond Offshore Drilling Inc. (DO), and oil-field services providers, like Halliburton Co. (HAL) and Weatherford International Ltd. (WFT), have shown recoveries as BP inches closer to putting an end to its catastrophic oil spill. But the prospects for a more sustained rally are dimmed by expectations for a slow recovery. Shares of Diamond and Noble are up 10% and 19%, respectively, from their June lows, while shares of Weatherford have climbed 24% and Halliburton stock is trading 44% higher. Industry experts and executives said an immediate rebound to pre-spill activity is unlikely because more intense federal regulations and higher costs could drive some companies away from the Gulf. Right now, most deepwater drilling has been ground to a halt by a federal moratorium set to expire Nov. 30. "You could see some kind of rally once this thing comes under control, but beyond that, it's going to be tough," said Bill Herbert, an analyst with Simmons & Co., noting that the U.S. could become a much smaller market for deepwater oil and gas exploration. Analysts said investors may be disappointed if activity doesn't bounce back immediately, or comes back more slowly than anticipated. And oil-field service companies, which provide technical expertise for offshore drilling, are already making adjustments to prepare for long-lasting delays and lower-than-normal activity for the foreseeable future. "We believe that even once the offshore ban is lifted, we'll see subdued offshore drilling activity in the U.S.," Bernard Duroc-Danner, chief executive of Weatherford International said Tuesday during a conference call. Both Weatherford and its larger peer, Halliburton, said this week that the drilling ban will prove to be a drag on profits. The companies said they would redeploy some equipment and workers to other areas but would maintain a presence in the Gulf to prepare for activity to eventually resume. David Lesar, chief executive of Halliburton, said that the spill will have a "profound impact" on the future of deepwater drilling and could restrain activity into the future as operators adjust to new offshore-drilling requirements. The long-term effects of the moratorium could also be compounded by the relocation of some drilling rigs. "I do not believe that the deepwater offshore rigs that were mobilized to international locations during the suspension will return to the Gulf for some time, if at all," Lesar said. Houston-based drilling contractor Diamond Offshore Drilling was the first to relocate rigs, sending two abroad. But others could follow. "We don't know what the government is going to do," Larry Dickerson, Diamond's chief executive, said in an interview. "There is uncertainty, and that's never good in a high-investment business." The delay could be amplified by tighter rules that require new safety equipment be installed in rigs, a time-consuming process that could cost drilling contractors millions of dollars. Also, operators will be more particular about choosing partners and will exercise more diligence before proceeding with drilling, because the spill has shined a bright light on industry practices. "The industry will still slow down after seeing such a horrific accident," said Fadel Gheit, an energy analyst with Oppenheimer & Co. -By Jason Womack, Dow Jones Newswires; 713-547-9201; jason.womack@dowjones.com (END) Dow Jones Newswires July 22, 2010 16:54 ET (20:54 GMT)