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No. of Recommendations: 5
I have owned RIG since 2004. I sold today.

In a nutshell, the rig explosion and subsequent oil spill could change everything in the deepwater drilling world. There is no visibility going forward. No visibility = no way to value the stock.

Why could it change everything?

Liability. At this point, we have no way of knowing what the extent of damage or RIG's liability will be. This is different from the Exxon, Valdez because the oil is still pouring into the Gulf. It might continue for a month or more. If their first plan to cover the well head fails, all bets are off at how much oil could spill or how large an area will be impacted. We could be looking at an event 10X or 100X the magnitude of Valdez. Furthermore, it is happening near a heavily populated commercial coastline.

Politics. For years, environmentalists have protested against offshore drilling, warning us that exactly this kind of scenario could occur. It did in 1969 in Santa Barbara, but since then we have comforted ourselves with the idea that technology had solved the problem and minimized the risk. While there is some truth in those sentiments, the drillers have gone farther offshore, into deeper water, and have continued raising the bar.

With this event, will the tide turn against offshore drilling? No way to know right now. If they cap the well next week, and minimize the damage, it might be viewed as a manageable risk with a few minor modifications to existing systems. If it goes on for a month or more, it could be a watershed event like 3 Mile Island. The public might just accept that oil has to be more expensive and come from onshore sources.

Public Opinion. If this goes on for a long time, public opinion might just realize that oil consumption is connected to more than whether or not they can afford to fill their tank, even in the solid red State South. If oil consumption in the U.S. continues to fall (and there are simple efficiency gains that could reduce it by 30%), there will be no need for deepwater oil for decades.

I'm a long term investor, but I don't make decisions on the basis that decades from now we'll need more resources. 2 weeks ago, I felt that the downside risks to RIG were far less than the upside potential for a long time. Now, I have no idea the magnitude of the downside, and the upside doesn't look too hot anytime soon.

No visibility. I'm out.
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