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Stock Strategist Industry Reports

Faulty Bolts Create Headaches for Offshore Industry

Offshore drillers face potential downtime headwinds in 2013, but this is unlikely to affect our fair value estimates.

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Nearly three years after the Macondo oil spill, the industry's eyes are focused on the Gulf of Mexico again. The Bureau of Safety and Environmental Enforcement has issued a notice to operators in the Gulf regarding a failed bolt that was part of  General Electric's (GE) H-4 connector, which connects the blowout preventer to the wellhead. The BSEE has directed operators to pull up every BOP in the Gulf to inspect it and replace any faulty bolts with newly certified ones, which has created headaches for the offshore drilling industry. We expect operators are now asking their drilling contractors to inspect BOPs worldwide, given the zero-tolerance environment around well control post-Macondo.

We see no immediate threat to valuations for the offshore firms we cover. The impact on the offshore drillers could very well be muted, depending on the outcomes of specific negotiations on a rig-by-rig basis and whether the bolts can be replaced as part of an already-planned maintenance program. Outside the Gulf of Mexico, operators very well may be more lenient without the specific regulatory action that we've seen in the Gulf.

Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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