Tropical Storm Isaac Spells Energy Trouble

by Aaron Levitt | August 28, 2012 7:00 am

Just when we thought that energy prices were on the decline,[1] we get thrown for a little loop. And this time, the culprit isn’t pending military action or an oil spill, but good ol’ Mother Nature.

On roughly the seventh anniversary of Hurricane Katrina, Isaac has rolled over Florida and into the open Gulf of Mexico. Meteorologists expect the storm to grow into a hurricane before hitting land somewhere between Louisiana and Florida.

That’s potentially a huge problem for both the energy industry as well as consumers’ wallets. With the Gulf of Mexico becoming a hot spot of energy production once again, any disruptions to that vital production could spell higher hydrocarbon prices and result in costly repair bills for the E&P firms.

Already, the situation seems to be pointing in that direction.

Category 1

Fueled by the Gulf’s warm waters, Tropical Storm Isaac is expected to strengthen into at least a Category 1 hurricane and hit Louisiana mid-week. According to the National Hurricane Center, the storm could intensify even further to a Category 2 hurricane and cause coastal flooding or storm surges up to 12 feet with mandatory evacuations possible across southeastern Louisiana, Mississippi and Alabama.

Once again, this comes nearly seven years to the day after devastating Hurricane Katrina struck the region. Back in August of 2005, Hurricane Katrina swept over the Gulf Coast[2] and killed more than 1,800 people and caused billions of dollars of damage.

Aside from the potential humanitarian disaster, another would-be issue is a-brewing. As we’ve noted here at InvestorPlace, the Gulf of Mexico is a major contributor[3] to America’s energy wealth.

According to the U.S. Energy Information Administration, the Gulf accounts for about 23% of all U.S. oil production and nearly 7% of its natural gas output. Aside from this production, the region plays another key role in our energy pie. About 30% of U.S. natural gas processing plant capacity and 44% of the country’s refining capacity also dot the Gulf Coast.

Isaac’s presence in the vast sea is already causing a wrinkle in this equation. The U.S. Bureau of Safety and Environmental Enforcement — which oversees offshore oil production[4] — reported that nearly 25% of oil production in the Gulf of Mexico has been shut down in advance of the storm.

Roughly 50 rigs and oil platforms have already been evacuated and more than 8% of natural gas production in the Gulf has also been halted. A variety of E&P firms — including Exxon Mobil (NYSE:XOM[5]), BP (NYSE:BP[6]) and Apache (NYSE:APA[7]) — have stepped up their efforts to remove non-core personal from the region.

Likewise, refinery capacity in the region has begun to close. Marathon Petroleum (NYSE:MPC[8]) initiated the shutdown of its 490,000 barrels-per-day refinery in Garyville, Louisiana today and Phillips 66 (NYSE:PSX[9]) said it was in the process of shutting down its 247,000 barrel-per-day Alliance refinery in Belle Chase. Plus, the single largest entry point for crude oil shipments coming into the U.S. — the Louisiana Offshore Oil Port — suspended offloading of oil tankers as well. Between 900,000 and 1 million barrels of oil a day is offloaded at the LOOP[10].

However, things could get much worse. Meteorologists at Weather Insight predict the storm will spur shutdowns of 85% of the U.S. offshore oil production capacity and 68% of the natural gas output. Then, there are the refinery closures to consider. With the major “heart” of the country’s capacity now offline, gasoline prices could spike just ahead of the U.S. Labor Day holiday.

Already, the average price of a gallon of regular gas has risen[11] to $3.75 ahead of the storm, but analysts predict that prices-per-gallon could rise another 10 cents quite quickly as the refinery closures/damages occur.

The Portfolio Impact

Back in 2008, Hurricanes Gustav and Ike disrupted offshore oil output for months and damaged onshore natural gas processing plants, pipelines and some refineries. Isaac seems to be on a similar destructive path. While it is hard to say exactly what damages — if any — will occur from the storm, there is the potential for things to get quite nasty. Twelve foot storm surges are no laughing matter.

Repair bills and the lost of idled production could impact earnings for the energy producers with strong ties to the region. Similarly, the refiners — who have enjoying a resurgence as of late due to gasoline exports[12] — could suffer as the downtime takes hold. However, one sub-sector continues to thrive in these sorts of situations: service stocks.

I’ve written favorably about the group before[13], but as Isaac moves on and dissipates, the oil service players will be the ones in charge of the clean-up and repairs. My favorite way to tap the group is still through the equal-weight SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES[14]).

The fund is a low-cost way to access the entire spectrum of oil services industry and includes names like ROV specialist Oceaneering International (NYSE:OII[15]) and construction firm McDermott (NYSE:MDR[16]), which will get the nod from E&P industry during the repair efforts.

Overall, the ETF and oil services sector is the best way to mitigate some of the short-term damage that Isaac could unleash.

As of this writing, Aaron Levitt was long XES.

  1. were on the decline,:
  2. swept over the Gulf Coast:
  3. major contributor:
  4. offshore oil production:
  5. XOM:
  6. BP:
  7. APA:
  8. MPC:
  9. PSX:
  10. offloaded at the LOOP:
  11. regular gas has risen:
  12. due to gasoline exports:
  13. before:
  14. XES:
  15. OII:
  16. MDR:

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