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By Jeremy Glaser | 05-07-2010 01:31 PM

The Hidden Impact of the Gulf Oil Spill

Morningstar's Eric Chenoweth thinks the impact of BP's gulf oil spill could be felt through the energy industry for years to come.

Jeremy Glaser: How will the Gulf oil spill affect BP and the rest of the oil industry? I'm Jeremy Glaser with Morningstar.com. Joining me today to discuss this is associate director Eric Chenoweth.

Eric, thanks for joining me today.

Eric Chenoweth: Thanks for having me.

Glaser: Maybe at first just looking at the short-term impact on BP, which is probably one of the most impacted stocks here, what do you think this means for investors and for the valuation of the firm?

Chenoweth: We adjusted our fair value shortly after the spill happened, and we made a small adjustment of two dollars per share. We drove that basically based on what's visible right now, and that is the spill, how expensive we think it could be, and what BP's share in that will be.

BP's the operator and owns 65 percent of the well, so they're likely to bear a lot of the lion's share of the cost. But I think the thing that's more interesting is what might not be seen and in what this might mean for the future of offshore drilling, which could be a bigger cost for the firm.

Glaser: So if we take that step back, and let's say Congress passes some draconian laws banning offshore drilling or making it much more expensive, who do you think would be the most hurt by that kind of legislation?

Chenoweth: We've tried to take a couple different approaches to thinking this through. We talked about the visible costs. The question is, is this a technology issue? Is the technology available to address new regulations?

I think a lot of it's going to come down to the investigation. Was this more human error, which means it's more of a visible issue, or was this a technological error that we can't get past?

If what we've been hearing, one side of it says blow-out preventers that exist today can only handle kicks that were a fraction of what we saw in this, that means there needs to be a whole retooling of the services industry and a lot of technology needs to come up to speed to address this, which could mean a lot of delays.

A lot of EMPs that have a lot of deep-water upside, like a BP or an Anadarko, both who were involved in this well, it would definitely threaten the speed with which they can develop their offshore properties.

But if technology can meet it, it could mean more a matter of higher cost to absorb, and that's a bit different because higher cost, while that would hurt, they could possibly overcome some of the issues in a shorter period of time. So it might just be a matter of cost and margin hit in that regard.

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