An oil well in the Brazos River Valley in central Texas on Thursday.
Photo by Justin Calhoun
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The storm that swept the South and left millions without reliable electricity or drinking water for much of last week provided a reminder: Software can reinvent American life, but it can’t replace the country’s hardware for basic services.
The government’s response will no doubt involve billions of dollars in new investments in electricity and other basic infrastructure for the benefit of equipment manufacturers. In the meantime, oil and gas companies that have avoided disruption should thrive as energy prices rise. Demand and supply will take a long time to return to equilibrium, benefiting companies that have been exempted from the worst storm damage.
Among those who could do well is the equipment manufacturer
Eaton
(ticker: ETN), industrial monster
General Electric
(GE), generator manufacturer
Generac Holdings
(GNRC), oil and gas producers
Hess
(HES) and
Northern Oil & Gas
(NOG) and refiner
PBF energy
(PBF).
President Joe Biden is committed to “rebuilding better,” and the storm will give his plan a new direction, said Jon Lieber, director general of the Eurasia Group and a former economic policy adviser to Senate minority leader Mitch McConnell.
The Texas crisis “is likely to change the policy mix and increase the priority given to grid reliability, water system resilience, climate resilience and things like that,” Lieber said. While Biden emphasized the environmental goals, an infrastructure bill will be much broader than this, stimulating more sectors. “This bill will be so big that there will be money for everyone,” he said.
Big storms occur every year and there is evidence that they have hit with increasing frequency as climate change intensifies. But the one that hit Texas and other states was particularly destructive to infrastructure. Analyst Paul Sankey of Sankey Research compared it to Hurricane Katrina in terms of its surprising strength and enormous ripple effects.
* Expected to lose money in 2021. E = Estimate.
Source: FactSet
More than two million barrels a day of oil production were shut down by the middle of the week. Sankey estimated that it could be more than three million barrels, or almost a third of US production; four million barrels of refining capacity; and more than 15% of natural gas production. West Texas Intermediate Oil Futures closed above $ 60 on Tuesday for the first time since January 2020, and the natural gas market went astray.
Texas rarely receives severe winter storms, so its infrastructure has not been prepared for its power. This included traditional energy sources, such as oil, gas and coal, and renewable energy sources. Natural gas, Texas’ largest source of electricity, had the biggest impact as wells and pipelines froze. The International Energy Agency has found that gas production capacity has dropped to 31 gigawatts from its normal winter capacity of 55 gigawatts. “Texas has a shortage of electricity because it has a gas shortage,” the agency said.
Texas Gov. Greg Abbott called on the state legislature to “mandate the wintering of the Texas power system” and said the measures could be taken through a faster emergency process. This type of quick financing and the promise of federal aid should benefit several industrial companies.
These include Eaton, which generates over 40% of its revenue from electrical equipment such as transformers, circuit breakers and power systems. Eaton is already at the center of a paradigm shift in the US network. “If you think about the future of the grid, everything we interact with will have the ability to both consume and sell electricity back to the grid,” CEO Craig Arnold said in December. The shares are trading at 22.8 times the expected earnings for 2021, equal to the S&P 500 index.
General Electric is similarly at the heart of the country’s infrastructure, supplying major components to wind and gas systems. CEO Larry Culp told a conference call on Wednesday that he expects GE to “be part of this solution” following the Texas outages.
Generac produces the vast majority of residential backup generators in the United States, and its sales usually increase after natural disasters. Earlier this month, Generac CEO Aaron Jagdfeld said the continued high level of power outages, combined with the emerging trend of “home as a sanctuary,” continues to lead to unprecedented levels of demand for standby generators. at home throughout the United States “
And even as oil and gas companies struggle to bring production back, Sankey sees potential benefits for those whose operations have not been through the storm. This includes Northern Oil & Gas, which rose 28% this year, after falling 63% last year. It is trading at five times the expected earnings for 2021. Another potential winner could be Hess, which has operations in North Dakota, the Gulf of Mexico and more locations abroad. PBF Energy, a New Jersey-based refinery, could benefit from its location, Sankey notes.
Al Root contributed to the reporting.
Write to Avi Salzman to [email protected]