Market Overview

Can These Companies Capitalize on Chevron's Messy Disaster?

Chevron's oil spill in the oil-rich Frade region of Rio de Janeiro is a well-publicized event, one that will most likely not end well for the drilling giant. Recently, the Brazilian government decided to file a $10.6 billion lawsuit against both Chevron (NYSE: CVX) and Transocean (NYSE: RIG), a move that could damage the local energy industry on all fronts.

According to Bloomberg, "Transocean operates 10 out of 61 oil rigs working in the country." Bloomberg also noted that the lawsuit will essentially freeze part of the oil production in the region, meaning that local energy companies as well as drillers will be missing out on potential profits during the duration of the legal hearings. While the situation appears to be especially dire for Chevron and Transocean, does it open up any opportunities for other US-based companies in the region?

One major possibility is that the Brazilian government could give smaller companies more responsibility. Since the Deepwater Horizon oil spill, facilitated by BP (NYSE: BP), Transocean, and Halliburton (NYSE: HAL), large energy conglomerates have been viewed as aggressive capitalists who could care less about the environment, all for the sake of profits. If Brazil were to take this route, which companies may be in contention?

Allis-Chalmers Energy

Allis-Chalmers Energy (NYSE: ALY) is a small-cap company that provides drilling solutions as well as equipment to companies that harvest oil and natural gas. Operating a similar business model to Transocean, Allis-Chalmers could conceivable take over operations in Frade Field in order to continue business as usual. The company currently owns a fleet of nearly 100 rigs.

The company already operates in Brazil, but it may be able to expand existing operations to compensate for the business lost by Transocean. Especially considering that existing drillers would want to capitalize on the 17% untapped market as a result of Transocean's mistakes, Allis-Chalmers could ramp up Brazilian operations in order to cater to hungry clients. This would benefit Allis-Chalmers along with local drillers and energy harvesters in the Rio de Janeiro area.

Parker Drilling Company

Parker Drilling (NYSE: PKD) is a small-cap company that provides ancillary services as well as consultancy solutions to contract drillers. If the Brazilian government is hesitant to allow other drillers or affiliated companies take over for Chevron and Transocean, it may benefit from expert consultancy services. Like with other sectors, consultants tend to scrutinize business practices and seek to optimize internal production chains in order to streamline overall operations. Currently, Parker Drilling conducts operations in the Middle East, Africa, Asia, and the US. It may be the type of company that would be able to help existing drillers out in their operations.

Hercules Offshore

Hercules Offshore (NASDAQ: HERO) provides specialized marine services for offshore drillers, meaning that it may be able to gauge drilling efficacy and feasibility in the Rio de Janeiro region. It could also operate its own rigs in the area, which means that it may be able to capitalize on Chevron's mistakes. Companies like Hercules Offshore could take over drilling in that area and make up for the lost business.

For a small-cap company, this could present itself to be a large, lucrative opportunity. If Hercules Offshore were able to secure a spot in Grade Field, it could potentially add over $500 million to its top-line, nearly doubling it. For reference, its revenues in 2010 were $657 million. If this occurred, the company may be able to turn itself around return to profitability.

The Bottom Line:

Some analysts and pundits believe that the Energy sector may be entering a golden age, which could be true, given strides taking place in the industry. Significant research and development efforts are being undertaken, and the energy landscape could change over the next few years, as we know it. Investors may want to consider smaller companies in this field if they seek to capitalize on the possible opportunities in energy.

Consumers have a few options when it comes to understanding the US economy. The energy sector is one indicator that could help investors gauge where the economy is heading into the future. Investors should also keep up with real-time news via platforms like Benzinga Pro in order to stay on top of major developments that move markets.


ACTION ITEMS:

Bullish View:
Traders who believe that small caps may be able to Capitalize on the Brazilian energy sector might want to consider the following trades:
  • Long some of the aforementioned companies, which could take over for Transocean or Chevron in Brazil. If they did, their revenues would increase dramatically.
  • Short large-cap competitors as a hedge to any long bets. Given what has happened with BP and Chevron, the Brazilian government may not trust large oil drillers with Frade Field.
  • Commodities may increase during the entire court case in Brazil. If so, small-cap and large-cap companies in the energy sector would be good buys along with the underlying commodities.
Bearish:
Traders who believe that small-cap companies will not take over the Brazilian operation may consider an alternate position:
  • Short the aforementioned companies, which may decline as market share is taken by larger companies.
  • Long an ETF such as the Energy SPDR (NSYE: XLE), which could increase if the court case is resolved without messy complications.
  • Long Royal Dutch Shell (NYSE: RDS.A), because it currently works in Frade Field and the Brazilian government may prefer current drillers to take over the rest of the unused field.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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