3 Things You Need to Know About BP's Suspension

This week, the Environmental Protection Agency suspended BP (NYSE: BP  ) from doing any new business with the U.S. government. This ban slightly changes BP's plans for drilling in the Gulf of Mexico and could hurt offshore drillers working for BP. Let's examine three effects of the EPA's recent decision, and one possible bright spot in the offshore drilling industry.

1. The suspension affects only new contracts
BP's punishment owes to what the EPA calls a "lack of business integrity," based on BP's response to the Deepwater Horizon disaster. The suspension also results from the criminal ruling against BP that orders the company to pay out $4.5 billion.

According the EPA's statement, suspensions are standard practice when a company receives a criminal ruling against it -- but that doesn't lessen the blow. BP won't be able to start any new contracts with the U.S. government, although current contracts, land leases, and drilling permits are still active.

In June, the government auctioned off 39 million acres in the Central Gulf of Mexico, and BP won the largest percentage of leases in that auction. BP won the bidding on 43 leases, about 24% of the total available, which remain active despite the new suspension.

2. It's already costing BP new leases
On the same day the suspension was announced, the Department of the Interior auctioned roughly 20 million acres worth of land leases in the Western Gulf of Mexico -- and BP missed out. BP is already the biggest oil producer in the Gulf of Mexico, so missing one auction won't derail the company's prospects in the region. But missing several could leave BP at a real disadvantage for future drilling.

EPA suspensions generally don't last longer than 18 months, and BP and the agency are working on an agreement to settle the suspension right now, according to Reuters. But it's still unclear whether BP will be allowed to participate in an upcoming Central Gulf auction in March, which will cover 38 million acres. The EPA estimates that those leases contain 460 million to 890 million barrels of oil  and up to 4 trillion feet of natural gas. If the suspension isn't lifted by then, BP will have to forgo any new leases in that region.

3. It'll hurt offshore drillers, too
Beyond the suspension's consequences for BP, the oil drillers it hires could also suffer in the future. Offshore drilling companies such as Seadrill (NYSE: SDRL  ) , Transocean (NYSE: RIG  ) , and Ensco (NYSE: ESV  ) all have long-term contracts with BP, and they need the company to win new leases so they can gain future jobs.

Seadrill has the fifth-largest offshore drilling fleet in the business, Ensco comes in at No. 2, and Transocean tops the list at No. 1. Clearly, they aren't completely dependent on BP. They also have contracts with ExxonMobil (NYSE: XOM  ) , Chevron, and Petrobras. But BP is one of the biggest fish in the Gulf, and if Seadrill, Ensco, and Transocean can't rely on it for future revenue, these companies could suffer.

The Foolish takeaway
I've already mentioned in a previous article that I wouldn't buy shares of BP right now, and the latest ban isn't sweetening the deal. But one player in all this mess could still see big rewards in the future. Seadrill has nine ultra-deepwater units scheduled for delivery between next quarter and 2014, and almost two dozen other units under construction. According to Fool writer Travis Hoium, these units will bring strong revenue growth in future quarters. On top of that, the company wants to cut costs by moving deepwater rigs off its balance sheet and into its newly formed MLP, Seadrill Partners.

Seadrill's Q3 wasn't anything to write home about. Analysts expected a net income of $1.11 billion and $0.68 EPS but got $216 million and $0.40 EPS instead. But Seadrill still kept a $0.85-per-share dividend in the third quarter, and it'll pay an accelerated dividend for the fourth quarter. With an 8.6% dividend yield, future prospects in the Gulf, and other drilling contracts around the world, Seadrill could prove a great Foolish fit for investors seeking an oil driller or dividend play.

To learn more about the strengths and weaknesses of Seadrill, as well as what to expect from the company going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2012, at 8:21 PM, RGysbertse wrote:

    Comon! The suspension is over the top. BP paid the price and is still paying for it globally, selling assets.The gulf incident could have have happened to any other major. Like BPMigas (read up pls), the EPA is needed but does not help the case. So we continue to pay taxes to pay these EPA guys a salary earned from 9am to 5pm.

  • Report this Comment On December 03, 2012, at 6:11 PM, Kauaicat wrote:

    This is nothing more than an EPA shakedown, and BP makes a convenient target, especially as a "foreign" company. BP will eventually pay a $huge$ ransom, and go on with its business. Nobody suffers ... except the stockholders and the Gulf Coast -based employees BP would have otherwise hired - two groups of constituents the present administration cares nothing about.

  • Report this Comment On December 04, 2012, at 2:26 PM, eeibbay wrote:

    I am not entirely sure about the logic that 'It'll hurt offshore drillers, too'. Somebody will win the auction and will probably use the same drillers.

  • Report this Comment On December 04, 2012, at 7:47 PM, astronut666 wrote:

    SDRL does not and has not had any rigs in the Gulf except for the rig used to drill the relief well - no impact to them at all.

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