The storm that swept through the South and left millions without electricity or reliable drinking water for much of the past week offered a reminder: Software may be reinventing American life, but it cannot replace the hardware the country depends on for services. basic.
The government’s response will undoubtedly involve billions of dollars in new investments for the electrical grid and other basic infrastructure, benefiting equipment manufacturers. Meanwhile, the oil and gas companies that avoided the disruption should prosper as energy prices rise. Supply and demand will take time to re-balance, benefiting companies that were spared the worst damage from the storm.
Among those that could do well are equipment manufacturers.
(ticker: ETN), industrial giant
(GE), generator manufacturer
(GNRC), oil and gas producers
Northern oil and gas
(NOG) and refiner
President Joe Biden has vowed to “build back better” and the storm is likely to give new direction to his plan, said Jon Lieber, managing director of the Eurasia Group and a former economic policy adviser to Senate Minority Leader Mitch McConnell.
The Texas crisis “is likely to change the policy mix and increase the priority given to electrical grid reliability, water system resilience, weather resistance, and the like,” Lieber said. While Biden has emphasized climate-friendly goals, an infrastructure bill will be much broader than that, boosting several sectors. “This bill will be so big that there will be money for everyone,” he said.
Major storms occur each year, and there is evidence that they have been hitting more frequently as climate change intensifies. But the one that hit Texas and other states was particularly destructive to infrastructure. Sankey Research analyst Paul Sankey compared it to Hurricane Katrina in terms of its surprising strength and huge domino effects.
* Money is expected to be lost in 2021. E = Estimate.
More than two million barrels a day of oil production closed in the middle of the week. Sankey estimated that 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 above $ 60 on Tuesday for the first time since January 2020, and the natural gas market went wild.
Texas rarely receives severe winter storms, so its infrastructure was unprepared for their force. That included traditional energy sources like oil, gas, and coal, and renewable energy like wind. Natural gas, the largest source of power for Texas electricity, was hit the hardest when wells and pipelines froze. The International Energy Agency found that gas generation capacity was reduced to 31 gigawatts from its 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 asked the state legislature to “mandate the winterization of the Texas electrical system” and says those measures could be passed through a faster emergency process. That kind of quick funding and the promise of federal aid should benefit several industrial companies.
Among them is Eaton, which derives 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 American network. “If you think about the future of the power grid, everything that we interact with will have the ability to consume and sell power to the grid,” CEO Craig Arnold said in December. The stock is trading at 22.8 times expected 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 the gas and wind power systems. CEO Larry Culp told a conference Wednesday that he hoped GE would “be part of that solution” after the Texas outages.
Generac manufactures the vast majority of residential backup generators in the US, and its sales generally grow after natural disasters. Earlier this month, Generac CEO Aaron Jagdfeld said that “the continued high level of power outages, combined with the emerging ‘home as sanctuary’ trend, continues to drive unprecedented levels of demand for standby generators. for home across the US
And even as oil and gas companies struggle to regain production, Sankey sees potential benefits for those whose operations weren’t 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 just five times expected earnings for 2021. Another potential winner could be Hess, which has operations in North Dakota, the Gulf of Mexico and several overseas locations. PBF Energy, a New Jersey-based refinery, could benefit from its location, Sankey says.
Al Root helped inform.
Write to Avi Salzman at [email protected]