Apart from the tremendous human suffering inflicted by Hurricane Katrina, many industries will see a profound impact (for good or ill) from this storm. As the cleanup and recovery process begins, we're just now beginning to get solid reports from the drilling companies that operate rigs in the Gulf of Mexico.
Thus far, the news isn't good, but it's not as bad as it could have been. While it's true that 58 platforms and rigs have supposedly been reported as damaged or displaced, that's a fairly small piece of the more than 4,000 platforms and 130+ drilling rigs operating in the region. Although many rigs remain unmanned and damage assessments aren't yet complete, it would appear as though the drilling infrastructure is more or less intact.
The impact
In the immediate wake of the storm, oil and gas production from the Gulf has dropped about 90% and 77%, respectively. Given that the Gulf provides about 25% of the energy needs of the U.S., that's a pretty significant gap. Thus far, though, it would appear that much of the production shutdown has been due to precautionary measures and not the result of profound structural damage.
Whither the rigs?
Using information I found at Rigzone.com, it would appear that about 117 drilling rigs were in the path of the storm, with 62 of those facing hurricane-force winds. As of the weekend reports, 12 of those rigs sustained significant damage and five of them are likely so damaged as to be scrapped -- including four platform rigs.
Rowan
Transocean
Platforms
It wasn't just the drilling rigs that faced the storm's wrath. At least 30 oil/gas platforms took damage, with 18 apparently lost entirely. Compare that to last year's Ivan, which destroyed seven platforms (and two rigs), and you see how much worse this storm was.
At this point, it would seem that Apache
Shell (owned in part by Royal Dutch
What it means to the companies
While the reported damage is certainly significant, with 30+ rigs and platforms lost or rendered useless, it would seem that rebuilding is possible. Of course, operators need to get people onboard these damaged rigs to better evaluate their status, as well as to check the status of their other rigs and pipelines. But it would appear that only a relatively slight percentage of the overall Gulf operating infrastructure was taken out by the storm.
In most cases, insurance will pay for the necessary repairs and replacements. But with shipyards already reporting full books for several years ahead, those companies whose rigs are damaged beyond repair will have to wait before they can replenish their fleet.
One company that may get a bit more attention is TODCO
In the meantime, companies leveraged to rig repair like Global Industries
The human factor
Let us not forget that many of those who man the rigs in the Gulf live in that area. While some rig workers live in Texas and Florida, the industry information that I've located suggests that about two-thirds of the platform offshore workers live in the areas hit by Katrina. At this point, it's probably fair to assume that many of them are more concerned with locating friends and family, to say nothing of finding clean water, food, and shelter, than they are about going back to work.
When all is said and done, these rigs and platforms are just giant steel hulks without the skilled workers there to man them. And while the job pays pretty well, it's difficult, demanding, and dangerous. With many workers likely displaced by the storm, I would expect the cost of labor to rise for most operators, assuming that enough people are willing and able to come back to work.
The bottom line
It's difficult for me to categorize much of anything tied to this storm as "good news," but the reports to date from the offshore operators suggest that the energy infrastructure has not been terribly damaged. While we have yet to hear anything on the numerous undersea pipelines, the damage inflicted by this storm is far from a total loss.
Accordingly, I would suggest that investors not overreact to this event. If you liked Apache before, the loss of 2% of its production shouldn't be seen as a deal breaker. Likewise for the other operators, I'm sure the shutdown and subsequent repair work will impair performance for the next quarter or two, but things should be largely back to normal by year's end. Furthermore, assuming that energy prices stay high (which is a pretty reasonable bet today), it's likely that operators can absorb higher labor costs without a major hit to the bottom line.
For those invested in the space, I suggest you follow the news carefully and keep it in perspective. While this was certainly a major disruption to operations, those companies whose rigs are still in good operating condition are likely to see even stronger demand and even more upward pressure on day rates. While the energy services sector will continue to be volatile and trade based on day-to-day perceptions of the energy market, the demand for energy, and by extension the demand for drilling, is not about to let up soon.
For more takes on the drilling and services industry:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
