Hurricanes have been the biggest story facing the entire country over the last few weeks. Our thoughts are with those in the affected areas. Tortoise specializes in essential assets and income investing, so we thought it would be helpful to analyze the effect Hurricane Harvey has had on the energy sector and how Hurricanes Harvey and Irma could potentially impact the high yield space.
Broad energy sector
As Hurricane Harvey wreaked havoc on the people of Texas, it also affected many critical energy assets along the Gulf Coast last week impacting the energy value chain. All indications are that most of the facilities will be up and running in days with some taking a few weeks to return to full operational status. Therefore, we believe that the operational impact on key assets will be minimal. There doesn't appear to be any significant structural damage reported by the companies that we invest in.
The most significant impact on stock prices will likely be from commodity prices movements. Crude oil prices could decline as demand for almost 4 million barrels of crude oil has been temporarily suspended due to refinery shutdowns. Of course, the demand will return as refiners refill refined product inventories. In the meantime, crude oil inventories will likely increase after falling for nine consecutive weeks. Natural gas prices could weaken as well as inventories rise due to many industrial facilities that are fueled by natural gas taking a few weeks to restart. Refining margins are expected to increase as gasoline prices increase due to declines in refined product inventories.
Let's take a quick look at how commodity prices responded to Harvey last week. Crude oil prices fell by 0.7% last week while natural gas prices declined by 1%. Wholesale gasoline prices experienced the largest move increasing by 5%. MLPs led a rally in the energy sector with the Tortoise MLP Index® rising by 3% and the S&P 500 Energy Select Sector® Index increasing by approximately 1%.
Upstream oil and natural gas producers
As of September 4th, approximately 1% of total U.S. oil and natural gas production was not operating. That represents approximately 121 thousand barrels per day of oil and 259 mmcf/d of natural gas from offshore production in the Gulf of Mexico that is not operating at the present time. Earlier in the week, a significant amount of production from the Eagle Ford shale was temporarily suspended but that lasted for only a few days. In general, Harvey has had little impact on oil and gas production volumes in the U.S.
The most significant energy infrastructure asset impacted by Harvey was the Colonial Pipeline, a refined product pipeline that extends 5,500 miles from Houston to the New York harbor delivering products such as gasoline to many large populations along the east coast. According to the U.S. Department of Energy, the pipeline was expected to begin delivering gasoline and diesel from Houston-based refineries starting Tuesday, September 5th. Most critical energy infrastructure assets negatively impacted appear to be operational as of now. For instance, Magellan's BridgeTex and Longhorn crude oil pipelines that transport almost 700,000 barrels per day of oil production from the Permian Basin to Houston were temporarily shut down last week due to flooding. These pipelines are now fully operational. Another key port, the Houston Ship Channel, has resumed operations. This is important as the Ship Channel serves as a key location for exporting U.S. produced crude oil and natural gas liquids such as propane.
Downstream end users
Eight refineries in the Gulf Coast remain shut down. These refineries have a combined refining capacity of 2.1 million barrels per day representing 11% of U.S. refining capacity. In addition, eight refineries have begun the process of restarting after being shut down last week. These refineries have a combined capacity of 1.8 million barrels per day representing 10% of total U.S. refining capacity.
Fixed income markets
As we think about high yield performance over the next few months, its stands a good chance that Harvey – and potentially Irma – will contribute to the winners and losers at the sector level. As recovery from Harvey has just begun, and Irma’s path has yet to be determined, it’s still too early to know the extent of the damage or the duration of the effects.
High yield homebuilder, automotive and gaming issuers are likely to feel a Harvey impact. Among the major homebuilder issuers, as much as 10-20% of construction is tied to Houston, which recently has been one of the largest metro areas for new home construction in the U.S. New home buyers could see prices rise due to labor and material shortages. In the automotive industry, August and September sales are likely to take a hit as both dealers and consumers focus on recovery, but longer-term, sales could get a boost from increased scrappage and replacement at dealer lots.
There are only a few issuers with outsized exposure to Texas, and these will likely see depressed sales results as the area recovers, compounded by costs to repair store damage. The one retail exception is the home improvement stores, which have benefitted from major storms in the past. While the major players in the space aren’t high yield issuers, there are several high yield building materials producers that will likely get a bump from increased repair demand. Equipment rental issuers, of which there are several in the high yield space, should also benefit from the repair work that will follow.
Taking a step back and thinking about the U.S. economy as a whole, early estimates from economists suggest that Harvey could negatively impact third quarter GDP growth from as little as a few tenths of a percent in the modest case to as much as 1.0-1.5% if the energy and chemical industries suffer from prolonged disruption. For the sake of the economy and the energy sector – but more importantly, for the sake of its people, we hope that Houston sees a quick recovery.
Disclaimer: Nothing contained in this communication constitutes tax, legal or investment advice. Investors must consult their tax adviser or legal counsel for advice and information concerning their particular situation. This article contains certain statements that may include “forward-looking statements.” All statements, other than statements of historical fact, included herein are “forward-looking statements.” Although Tortoise believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Actual events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors. You should not place undue reliance on these forward-looking statements. This podcast reflects our views and opinions as of the date herein, which are subject to change at any time based on market and other conditions. We disclaim any responsibility to update these views. These views should not be relied on as investment advice or an indication of trading intent.
The Tortoise MLP Index® The Tortoise MLP Index® is a float-adjusted, capitalization weighted index of energy master limited partnerships (MLPs). The index is comprised of publicly traded companies organized in the form of limited partnerships or limited liability companies engaged in transportation, production, processing and/or storage of energy commodities.
Tortoise MLP Index®, Tortoise North American Oil & Gas Producers IndexSM, (the “Indices”) are the exclusive property of Tortoise Index Solutions, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Indices. The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omission in calculating the Indices. “Calculated by S&P Dow Jones Indices” and its related stylized mark(S) are service marks of S&P Dow Jones Indices and have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”).
The S&P Energy Select Sector® Index The S&P Energy Select Sector® Index is a capitalization-weighted index of S&P® 500 Index companies in the energy sector involved in the development or production of energy products.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.