Friday, October 29, 2010

What Will Halliburton's (NYSE:HAL) Failure Cost Them? What Will BP (NYSE:BP) Gain?

The narrative has changed quickly concerning the BP (NYSE:BP) oil spill, as the investigation surrounding the cement job performed by Halliburton (NYSE:HAL) could drastically change the liability outlook.

So far BP has rightly been the main focus of investigations, but that couldn't have remained the case throughout the entirety of the story because of there being so many contractors and others whose equipment and actions may have led to the failure on the Deepwater Horizon oil rig.

Investigators from the oil spill commission have determined the cement used by Halliburton was unstable, and Halliburton has admitted the final formulation used wasn't completed checked for its stability.

While Halliburton continues to dispute whether the actual formula they used is the one being tested, it seems it is close enough or accurate enough to make a judgment over, as the commission, and an independent study by Chevron (NYSE:CVX) seems to have confirmed.

With failures to completely test the mixture, there is no doubt Halliburton will incur some liability in the matter. It's only a matter of how much liability, not if they'll face it. There is also the question of whether they're insured enough to cover the liabilities, or it'll cost their bottom line.

It has already pushed up the costs of doing business through the increase in cost of their credit-default swaps, and there will surely be more to come.

For BP, this could be helpful once liability is determined. Whether or not it comes from an insurer or Halliburton directly, it could ease the liability load for them, and release capital over a period of time.

The other major element in liability is the blowout preventer provided by Cameron International (NYSE:CAM), which also failed to do its job. That's being tested at this time as to why it failed.

Concerning liability, BP has probably seen the worst, and anything like this is positive news for them from a financial perspective, but also helps them some reputationally, as people realize they weren't the sole company responsible for the disaster, and in some cases, like with the cement mixture, was out of their hands.

That does bring up something all oil companies said they've learned from this, and that is they must keep a much closer watch on contractors, even those like Halliburton, who had had a pretty good reputation as far as quality work goes.

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