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 power or reliable drinking water for much of the past week reminded us: Software can reinvent American life, but it cannot replace the hardware the country depends on for basic services .
The government response will no doubt involve billions of dollars in new investment in the power grid and other basic infrastructure, benefiting equipment manufacturers. Oil and gas companies that avoided the disruption should, meanwhile, thrive when energy prices rise. Supply and demand take time to rebalance, which benefits the companies that were spared the worst damage from the storm.
Among those who could do well is the equipment manufacturer
Eaton
(ticker: ETN), industrial colossus
General Electric
(GE), generator maker
Generac Holdings
(GNRC), oil and gas producers
Hess
(HES) and
Northern oil and gas
(STILL), and refinery
PBF energy
(PBF).
President Joe Biden pledged to “build back better” and the storm is likely to redirect his plan, said Jon Lieber, Eurasia Group director and former economic policy adviser to Mitch McConnell, leader of minorities in the Senate.
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 has emphasized climate-friendly goals, an infrastructure law will be much broader than that, encouraging different sectors. “This bill is getting so high that there will be money for everyone,” he said.
Major storms happen every year and there is evidence that they are increasingly hitting as climate change intensifies. But the one that ravaged Texas and other states was extremely destructive to the infrastructure. Sankey Research analyst Paul Sankey compared it to Hurricane Katrina in terms of its surprising power and its massive ripple effects.
* Expected to lose money in 2021. E = estimate.
Source: FactSet
More than two million barrels of oil production per day were shut down mid-week. Sankey estimated it might be more than three million barrels, or nearly 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 for the first time since January 2020 on Tuesday, and the natural gas market went haywire.
Texas rarely gets severe winter storms, so the infrastructure was not prepared for the strength of these. That included traditional energy sources such as oil, gas and coal, and renewable energy sources such as wind. Natural gas, the largest source of electricity in Texas, was hit the hardest as wells and pipes were frozen. The International Energy Agency found that gas generation capacity has fallen to 31 gigawatts from the normal winter capacity of 55 gigawatts. “Texas has a power shortage because it has a gas shortage,” the agency said.
Texas Gov. Greg Abbott has called on the state legislature to “mandate the winterization of the Texas electricity system” and says these measures could be guided through a faster emergency process. That kind of quick funding and the promise of federal aid should benefit several industrial companies.
One of these is Eaton, which derives more than 40% of its sales from electrical equipment such as transformers, circuit breakers and power systems. Eaton is already at the center of a paradigm shift in the US grid. “If you think about the future of the grid, everything we deal with will be able to both consume electricity and sell it back to the grid,” CEO Craig Arnold said in December. The stock trades at 22.8 times projected earnings for 2021, equal to the S&P 500 index.
Similarly, General Electric is at the center of the country’s infrastructure, supplying important components of wind and gas power systems. CEO Larry Culp said at a conference Wednesday that he expected GE to be “part of that solution” after the Texas outage.
Generac makes the vast majority of residential backup generators in the US, and sales tend to grow after natural disasters. Earlier this month, Generac CEO Aaron Jagdfeld said that “the ongoing increased level of power outages, coupled with the emerging ‘home as a haven’ trend, continues to drive unprecedented demand for home standby generators across the US”
And even as oil and gas companies struggle to reduce production, Sankey sees potential benefits for those whose operations were not in the storm’s path. That includes Northern Oil & Gas, which is up 28% this year after falling 63% last year. It is trading at only five times its expected 2021 earnings. Another potential winner could be Hess, which has operations in North Dakota, the Gulf of Mexico and several overseas territories. PBF Energy, a refinery based in New Jersey, could benefit from its location, Sankey notes.
Al Root contributed to reporting
Write to Avi Salzman at [email protected]