Friday, July 2, 2010

BP -- Relief is Two Weeks Away

It is likely that two developments during the first half of July could effectively end much of the uncertainty regarding the oil spill. The first is the relief well, which is, according to BP technical executive Kent Wells, proceeding better that anyone could have hoped for.

Since June 17th, when the #1 relief well was drilled to 15,900 feet (measured distance from sea level), the following progress has been made.

1. The 13" casing was set in cement.

2. The remaining distance of less than 2,000 feet has been drilled to within 600 to 800 feet measured distance to the planned intersection point.

3. The distance from the Macondo well has been closed from about 200 feet to about 16 feet.

4. 3 or 4 ranging runs have been completed. A ranging run involves pulling the drill string and attaching a special ranging tool to determine the exact location vis a vis the Macando well.

Remaining tasks include the following:

1. Drill 600 to 700 feet parallel to the Macondo well.

2. Take ranging runs as needed.

3. Stop within 50 feet of the planned intersection and cement the final casing (liner).

4. Intersect the well bore and kill with mud, then cement.

Based on the success of the past two weeks, it is reasonable to expect that the relief well operation will continue to make relative rapid process.

In addition to the relief well, which would end the leakage into the Gulf, the BP subsea containment effort is close to capturing the vast majority of the remaining leakage. The current liminting variable is their ability to process oil brought to the surface.

To that end, BP has all the infrastructure in place to connect the Helix Producer to the kill line from the blowout protector, attached to subsea manifolds and a floating riser, and increase their processing capacity by about 20,000 b/d.

It is likely that this will result in all the oil that can be produced using the current 'top cap' can be processed. If this is done and if the total leakage is less than 45,000 b/d, then the amount of oil leaking into the Gulf will be minimal. In addition, the uncertainty regarding the well float rate will be resolved with a high level of confidence.

According to BP, the only issue regarding implementation of the Helix Producer are high seas from Hurricane Alex. They have said they need 3 days with seas of 3 feet or less (the current waves are in the 6 feet to 8 feet range.

Based on recent history, the BP subsea containment effort has consistently run into delays, so the possibility of problems using experimental technology remains high.

The investment thesis of this is based on the fact that the media is taking an very pessimistic view of the likely outcome of the oil spill. And, there are still risks involved. All the things that have been discussed at length in the popular media could happen. The worst case is not reflected in the current price of the stock.

However, the relatively better outcomes discussed in this post will be discounted sooner rather than later. Take advantage of uncertainty while it is still weighing heavily on this stock with the knowledge that better outcomes are significantly more likely than relatively worse outcomes.

The primary sources for this are BP and Government press releases. Diagrams modified from BP diagrams. The author has options positions on BP.