Halliburton: Negative reaction appears overdone

BAC:

 

Buying into the weakness HAL’s enterprise value is down ~$4bn following the preliminary finding of the National Commission on the BP Deepwater Horizon. At face value, these finding suggest HAL used cement that was not stable. However, we focus on two key points: (1) HAL’s contract appears to indemnify in such an instance (the contract with BP was just released and we’re reviewing); (2) cement failures are not uncommon and HAL had personnel on site to remediate. The decisions to not run tests to prove the efficacy of the cement job were not HAL’s.

National Commission conclusions on the Macondo incident

A letter from the National Commission on the BP Deepwater Horizon released today arrived at four preliminary conclusions: (1) only 1 of 4 tests HAL ran on various slurry designs for the final cement job on the Macondo well indicated that the slurry would be stable; (2) the cement job may have been pumped without any lab results that the foam cement slurry would be stable; (3) HAL and BP both had results a month before the Macondo incident that a similar foam slurry design to the one actually pumped at the Macondo well would be unstable but both parties failed to act upon it; and (4) HAL and perhaps BP should have considered redesigning the foam slurry.

HAL rebuttal

HAL believes: (1) conditions used by Chevron on test runs done on behalf of the Commission were not identical to those used on the Macondo well; (2) slurry tests performed by HAL did show stability (though the timing of those tests are unclear); (3) as the National Commission report lays out “cementing failures are not uncommon even in the best circumstances” and hence negative pressure test and cement evaluation logs are performed to identify cementing failures which BP and/or RIG misinterpreted or chose not to conduct such tests; and (4) HAL is fully indemnified as per its contract with BP (clause 19), which HAL posted on its website today.

 

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