by Dr. Kent Moors, Edi­tor, The Oil & Energy Investor

May 5, 2010

I find it uncom­fort­able to advise investors on how to make a profit in the after­math of a tragedy. And the drama unfold­ing in the Gulf of Mex­ico is rapidly devel­op­ing into just that sort of situation.

It has already led me to pro­vide one alert – “Expect Transocean to Keep Going Down” (April 30) – point­ing out a profit oppor­tu­nity. But Transocean is hardly the only com­pany to feel the heat from this widen­ing disaster.

There are more oppor­tu­ni­ties emerg­ing for the aver­age investor, and I'll be pro­vid­ing some of them in a minute. How­ever, first, we need to put this in its proper context.

The sink­ing of the Deep­wa­ter Hori­zon plat­form off the Louisiana coast has been, fore­most, a human tragedy, with 11 dead. Round two is an envi­ron­men­tal dis­as­ter, as a huge swath of eco­log­i­cally sen­si­tive coast­line awaits the onslaught of the widen­ing oil slick.

This dis­as­ter has single-handedly derailed an energy bill on Capi­tol Hill... prompted every gov­er­nor con­sid­er­ing off­shore drilling to do an abrupt about-face... and revised how both pub­lic opin­ion and the mar­ket will look at oil pro­duc­tion for years to come.

In the After­math of the Spill, Three Invest­ment Plays Gain Con­sid­er­able Upside Potential

In addi­tion to Transocean Ltd. (NYSE:RIG), the owner of the rig, two other com­pa­nies are cer­tain to be answer­ing to a ris­ing num­ber of law­suits and feel­ing intense polit­i­cal heat: BP plc (NYSE:BP), the oper­a­tor, and Hal­libur­ton Co. (NYSE:HAL).

Hal­libur­ton is com­ing under fire because of sus­pect well-cementing, which some ana­lysts are sug­gest­ing is the cause of the ini­tial explo­sion and fire. Transocean con­tin­ues to have less of a mar­ket sup­port sys­tem than either BP or Hal­libur­ton. That means, as these three com­pa­nies move squarely into the crosshairs of mul­ti­ple law­suits, Transocean will remain the most exposed.

For the investor, how­ever, the after­math of the spill is pro­vid­ing three sep­a­rate plays to par­tic­i­pate in sig­nif­i­cant upside invest­ment move­ment. Each of these seg­ments will find share prices ben­e­fit­ing, both from the clean-up of the oil spill and from the oblig­a­tion we now have to re-evaluate how we extract oil.

First up are the imme­di­ate ben­e­fi­cia­ries. While crews fight off the oil slick, and BP decides how to cap the rup­tured well­head more than a mile down, sev­eral com­pa­nies will receive increased attention.

Nalco Hold­ing Co. (NYSE:NLC) is already pro­vid­ing BP with chem­i­cal dis­per­sant to use on the slick. Expect this spe­cial­ized ser­vice chem­i­cal com­pany to obtain increas­ing orders from both the oper­at­ing com­pany and the coastal areas under siege.

Other ben­e­fi­cia­ries, short term, will be Baker Hughes Inc. (NYSE:BHI) and Shaw Group Inc. (NYSE:SHAW). Both will be called upon for much of the engi­neer­ing, design, pipeline, and infra­struc­ture devel­op­ment needed for any move to cap the under­wa­ter gusher.

Unlike the exploits of the famous oil fire­fighter Red Adair, nobody has ever attempted what needs to be done to cap this well. Since there is no imme­di­ate fix for this rup­ture or the widen­ing slick, the ser­vices of such com­pa­nies will be exten­sive and ongo­ing.

The sec­ond play will pro­vide a use­ful off­set strat­egy mov­ing for­ward. The over­all effect on invest­ment in the energy sec­tor will undoubt­edly end up empha­siz­ing the environmental

impact of both onshore and off­shore drilling. That, in turn, will bring into play a wide range of envi­ron­men­tal ser­vice companies.

The most direct way to bal­ance the entire sec­tor is to use the Mar­ket Vec­tors Envi­ron­men­tal Ser­vices ETF (NYSE:EVX). This exchange-traded fund attempts to repro­duce – at least before fees and expenses – the price and yield per­for­mance of the NYSE Arca Envi­ron­men­tal Ser­vices Index (AMEX: ^AXENV). AXENV, in turn, is a mod­i­fied equal dollar-weighted index com­pris­ing 21 com­pa­nies, all included in EVX. Nalco and Shaw are two of those companies.

The third play comes from a num­ber of oppor­tu­ni­ties devel­op­ing with com­pa­nies that will ben­e­fit medium– to long-term from the changes in strat­egy dic­tated by the Gulf spill.

Rentech Inc. (AMEX:RTK) is one of two stocks I am tar­get­ing in this third cat­e­gory, but it is another entry on both EVX and AXENV, as well. Rentech is a devel­op­ing small-cap leader in syn­thetic fuels and deliv­ery, as well as a ris­ing mover in the eco-friendly world of alter­na­tive energy.

My final sug­ges­tion comes from the other end of the spec­trum. McDer­mott Inter­na­tional Inc. (NYSE:MDR) is a major multi-billion fab­ri­ca­tor of off­shore plat­forms, deliv­ery sys­tems, and sup­port infra­struc­ture. It is a pri­mary com­peti­tor of Transocean in Asia, Latin Amer­ica, the Per­sian Gulf, and the Gulf of Mexico.

Off­shore drilling is cer­tainly com­ing under pres­sure from U.S. author­i­ties, and we should not expect any major new drilling activ­ity any­where near the con­ti­nen­tal shelf for some time. But such drilling will con­tinue else­where. Transocean's Deep­wa­ter Hori­zon prob­lems will trans­late into increas­ing lever­age for com­peti­tors such as McDermott.

Dr. Moors is the Edi­tor of The Oil & Energy Investor and has been advis­ing the “Big Boys” for 31 years now, includ­ing six of the world’s top 10 oil com­pa­nies and lead­ing nat­ural gas pro­duc­ers through­out Rus­sia, the Caspian Basin, the Per­sian Gulf and North Africa. For his lat­est energy oppor­tu­nity report, visit www.oilandenergyinvestor.com

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