Thursday, an oil well in the Brazos River Valley in central Texas.
Photograph by Justin Calhoun
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The storm that ravaged the south and left millions without energy or reliable drinking water for much of last week recalled: software can reinvent American life, but it cannot replace the hardware on which the country depends for basic services.
The government’s response will no doubt involve billions of dollars in new investments in the power grid and other basic infrastructure, which will benefit equipment manufacturers. Meanwhile, oil and gas companies that avoided the disruption should thrive as energy prices rise. Supply and demand will take time to return to balance, benefiting the companies that were spared the worst of the storm damage.
Among those that could work well is the equipment manufacturer
Eaton
(ticker: ETN), industrial giant
General Electric
(GE), generator manufacturer
Generac Holdings
(GNRC), oil and gas producers
Hess
(HES) i
Northern Oil & Gas
(NOG) and refiner
PBF energy
(PBF).
President Joe Biden pledged to “rebuild better” and the storm is likely to give new direction to 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 prioritizes power grid reliability, water system resilience, climate resilience, and things like that,” Lieber said. While Biden has emphasized climate-friendly goals, the infrastructure bill will be much broader than that, driving several sectors. “This bill will be so big that there will be money for everyone,” he said.
Great storms occur every year and there is evidence that they have been hitting with increasing frequency as climate change intensifies. But what 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 amazing strength and the huge effects of the ripple.
* Money was expected to be lost in 2021. E = Estimate.
Source: FactSet
More than two million barrels of oil production a day closed in half a week. Sankey estimated 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 on Tuesday for the first time since January 2020 and the natural gas market collapsed.
Texas rarely receives severe winter storms, so its infrastructure was unprepared for its strength. This included traditional energy sources such as oil, gas and coal and renewable energies such as wind. Natural gas, Texas ’largest source of electricity, suffered the most from the freezing of wells and pipes. The International Energy Agency found that gas generation capacity fell to 31 gigawatts from its normal winter capacity of 55 gigawatts. “Texas has a shortage of electricity because it has a shortage of gas,” the agency said.
Texas Gov. Greg Abbott has called on the state legislature to “order the wintering of the Texas power system,” and said such measures could be passed through a faster emergency process. This type of quick financing and the promise of federal aid should benefit several industrial companies.
Among them is Eaton, which earns more than 40% of its revenue from electrical equipment such as transformers, switches and power systems. Eaton is already at the center of a paradigm shift in the American network. “If you think about the future of the power grid, everything we interact with will have the potential to consume and sell electricity to the grid,” Craig Arnold, CEO, 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 located in the center of the country’s infrastructure, supplying major components of wind and gas power systems. CEO Larry Culp said Wednesday at a conference that he hoped GE would “be part of that solution” after the Texas disruptions.
Generac makes the vast majority of residential backup generators in the U.S., and its sales typically grow after natural disasters. Earlier this month, Generac CEO Aaron Jagdfeld said the high level of power outages, combined with the emerging trend of “home as a sanctuary,” continue to drive unprecedented levels of demand for home waiting generators across the United States. ”
And while oil and gas companies are struggling to regain production, Sankey sees potential benefits for those people who weren’t on the path to the storm. This includes Northern Oil & Gas, which is up 28% this year after falling 63% last year. It is trading at just five times the earnings projected for 2021. Another possible winner could be Hess, which has operations in North Dakota, the Gulf of Mexico and several overseas locations. PBF Energy, a New Jersey-based refiner, could benefit from its location, Sankey notes.
Al Root provided reports.
Write to Notice Salzman to [email protected]