An oil well in the Brazos River Valley in central Texas on Thursday.
Justin Calhoun photography
Text size
The storm that hit the South and left millions without power or reliable drinking water for much of last week offered a reminder: the software may be reinventing American life, but it cannot replace the hardware the country depends on for basic services.
The government’s response will undoubtedly involve billions of dollars in new investments for the power grid and other basic infrastructure, benefiting equipment manufacturers. In the meantime, oil and gas companies that have avoided disruption are expected to thrive on rising energy prices. Supply and demand will take time to balance, benefiting companies that have been spared the greatest damage from the storm.
Among those who could do well are equipment manufacturers
Eaton
(ticker: ETN), industrial giant
General electrical
(GE), generator manufacturer
Generac Holdings
(GNRC), oil and gas producers
Hess
(HES) and
Northern Oil and Gas
(NOG), and refiner
PBF Energy
(GMP).
President Joe Biden has promised to “rebuild better” and the storm is likely to set a new course for his plan, said Jon Lieber, managing director of the Eurasia Group and former economic policy adviser to Senate minority leader Mitch McConnell.
The Texas crisis “probably changes the policy mix and raises the priority given to grid reliability, water system resilience, climate resilience and the like,” said Lieber. Although Biden emphasized climate-friendly targets, an infrastructure bill will be much more comprehensive than that, boosting multiple sectors. “This account is going to be so big, there will be money for everyone,” he said.
Major storms occur every year and there is evidence that they have been occurring with increasing frequency as climate change intensifies. But the one that hit Texas and other states was particularly destructive to the infrastructure. Sankey Research analyst Paul Sankey compared it to Hurricane Katrina in terms of its surprising strength and huge cascading effects.
* Forecast of money loss in 2021. E = Estimate.
Source: FactSet
More than two million barrels a day of oil production were stopped in the middle of the week. Sankey estimated 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 on Tuesday above $ 60 for the first time since January 2020, and the natural gas market has gone crazy.
Texas rarely experiences severe winter storms, so its infrastructure was not prepared for its strength. This included traditional energy sources, such as oil, gas and coal, and renewables, such as wind. Natural gas, the largest source of electricity in Texas, suffered the most, as wells and plumbing froze. The International Energy Agency found that the gas generation capacity has dropped to 31 gigawatts from its normal winter capacity of 55 gigawatts. “Texas is short of power because it is short of gas,” said the agency.
Texas Governor Greg Abbott asked the state legislature to “order the Texas power system to prepare for winter” and said these measures could be approved by a faster emergency process. This type of quick financing and the promise of federal aid are expected to benefit several industrial companies.
Among them is Eaton, which obtains more than 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 United States grid. “If you think about the future of the power grid, everything we interact with will have the ability to consume and sell electricity back to the grid,” said CEO Craig Arnold in December. The shares are traded at 22.8 times the expected profit for 2021, equal to the S&P 500 index.
General Electric is also at the center of the country’s infrastructure, supplying the main components of wind and gas energy systems. CEO Larry Culp said at a conference on Wednesday that he expected GE to “be part of that solution” after the Texas disruptions.
Generac manufactures the vast majority of residential backup generators in the United States and its sales typically grow after natural disasters. Earlier this month, Generac CEO Aaron Jagdfeld said that “the continued high level of power outages, combined with the emerging trend of ‘home as a sanctuary’, continues to drive unprecedented levels of demand for home generators. booking across the US “
And even as oil and gas companies struggle to bring production back, Sankey sees potential benefits for those whose operations were not on the path of the storm. This includes Northern Oil & Gas, which grew 28% this year, after falling 63% last year. It is traded at just five times the expected profit for 2021 Another potential winner may be Hess, which has operations in North Dakota, the Gulf of Mexico and several locations abroad. PBF Energy, a New Jersey-based refiner, could benefit from its location, Sankey notes.
Al Root contributed reports.
Write to Avi Salzman at [email protected]