An oil well in the Brazos River Valley in central Texas on Thursday.
Photo by Justin Calhoun
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The storm that hit the South and left millions of people without power or reliable drinking water over the past week has given a reminder: software can rediscover American life, but it cannot replace the hardware on which the country depends for basic services .
The government’s response will undoubtedly include billions of dollars in new investments in the electricity grid and other basic infrastructure, which benefit equipment manufacturers. Oil and gas companies that have avoided the disruption, meanwhile, must prosper as energy prices rise. Demand and supply will take time to rebalance, and this will benefit the companies that have suffered the worst damage from the storm.
Among those who can do well is the equipment manufacturer
Eaton
(ticker: ETN), industrial foot
General Electric
(GE), generator manufacturer
Generac Holdings
(GNRC), oil and gas producers
Hess
(HES) and
Northern oil and gas
(STILL), and refiner
PBF Energy
(PBF).
President Joe Biden has promised to ‘build back better’, and the storm is likely to give his plan new direction, says Jon Lieber, managing director of Eurasia Group and a former economic policy adviser to Mitch McConnell, Senate minority leader.
The Texas crisis “is likely to change the mix of policies and increase the priority of reliability of electrical networks, resilience of water systems, climate resilience and the like,” Lieber said. While Biden has emphasized climate-friendly goals, an infrastructure bill will be much broader than that, boosting multiple sectors. “This account is going to be so big that there will be money for everyone,” he said.
Major storms occur every year, and there is evidence that it has hit more and more as climate change increases. But the one that toppled Texas and other states was particularly devastating to infrastructure. Analyst Paul Sankey of Sankey Research compared it to Hurricane Katrina in terms of its surprising power and the enormous ripple effects.
* It is expected to lose money in 2021. E = Estimate.
Source: FactSet
More than two million barrels a day of oil production were closed by the middle of the week. Sankey estimates that it could be more than three million barrels, or nearly a third of U.S. 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 was booming.
Texas rarely gets severe winter storms, so the infrastructure was not prepared for the strength of this one. It included traditional energy sources such as oil, gas and coal and renewable energy such as wind. Natural gas, the largest power source for electricity in Texas, suffered the biggest blow as wells and pipes froze. The International Energy Agency has found that gas generation capacity has dropped to 31 gigawatts from its normal winter capacity of 55 gigawatts. “Texas has a power shortage because it has a guest shortage,” the agency said.
Texas Gov. Greg Abbott has called on the state legislature to order “the winterization of the Texas power system” and says these measures could be implemented through a faster emergency process. This kind of quick financing, and the promise of federal aid, should benefit several industrial enterprises.
Among them is Eaton, which makes more than 40% of its revenue from electrical equipment such as transformers, circuit breakers and power systems. Eaton is already in the midst of a paradigm shift in the American network. “If you think about the future of the electricity grid, everything we communicate with can have the ability to both consume and sell electricity,” CEO Craig Arnold said in December. The stock is trading at 22.8 times expected 2021 earnings, equivalent to the S&P 500 index.
General Electric is also the center of the country’s infrastructure and supplies major components of wind and gas power systems. CEO Larry Culp said at a conference on Wednesday that he expects GE to be “part of the solution” to the Texas disruptions.
Generac makes up the vast majority of residential generators in the US, and its sales usually grow after natural disasters. Earlier this month, Generac CEO Aaron Jagdfeld said that ‘the ever-increasing level of power outages, coupled with the emerging’ home as a sanctuary ‘trend, continues to drive unprecedented levels of demand for household generators across the US promote ‘
And even as oil and gas companies struggle to bring production back, Sankey sees potential benefits for those whose operations were not in the storm’s path. These include Northern Oil & Gas, which rose 28% this year after falling 63% last year. It trades at just five times expected 2021 earnings. Another potential winner could be Hess, which operates in North Dakota, the Gulf of Mexico and several overseas locations. PBF Energy, a refinery in New Jersey, could benefit from its location, Sankey says.
Al Root contributed reporting.
Write to Avi Salzman by [email protected]