Earlier this week, a massive chill engulfed much of the U.S. heartland. As the human tragedy of the deadly Arctic outbreak has unfolded, investors have started asking themselves, “what’s next?”
Already, dozens of factories have shuttered, many without clear timelines for resuming production. Almost 3 million customers remain without power, and the severity of the crisis will have politicians debating for decades on how to best revamp Texas’ aging power grid. As we emerge from this humanitarian disaster, here are the winners and losers from the Texas Deep Freeze of 2021.
Winners: Gas Companies, Home Repair
Natural Gas. Around half of Texas’ electricity is supplied via natural gas. So as energy demands increased this week, gas prices rose as well. The benefit, however, hasn’t been felt evenly. Natural gas is notoriously difficult to transport, which means prices can vary wildly. Spot rates for next-day delivery in Oklahoma, for instance, climbed to $1,250 per million BTU on Wednesday, up from just $9 last week. Henry Hub in Louisiana, on the other hand, rose to only $20.
Oil and gas companies have followed suit. Sandridge (NYSE:SD) and Torchlight Energy Resources (NASDAQ:TRCH), companies that operate in the Texas Permian Basin, have seen shares rise almost 200% since the beginning of the crisis. Meanwhile, oil and gas companies operating in the Marcellus Shale in Pennsylvania and other unaffected areas haven’t seen the same benefits. Cabot Oil and Gas (NYSE:CBT) stock have remained flat.
Cautious investors might view these gains by Permian Basin players as a one-time boost. High natural gas prices typically fall in the spring as heating consumption moderates. Bullish investors, meanwhile, will see this as a longer-term play on an electricity grid that will eventually build in extra capacity for more fossil fuels. As this week’s events highlighted, much of West Texas needs greater generation capacity to manage future crises.
Home Repair. Even before the Texas deep freeze, companies like Lowes (NYSE:LOW) had already announced plans to add thousands of new staff for the recovering home-renovation industry. The Texas disaster has provided an even greater push toward that.
As the Midwest and South look to rebuild after cracked pipes and storm damage reports, these companies will continue to win. Tractor Supply Company (NASDAQ:TSCO) stock has already risen 25% since the start of February. More gains could be on the way.
Losers: Automobiles, Insurance/Utilities, Texans
With at least 16 people dead and millions more still without power, the deadly Arctic chill has wreaked havoc on Texans and other Americans alike.
As power grids went offline, however, dozens of factories also found themselves in dire straits. Earlier this week, Austin’s local energy provider asked all large-scale manufacturers to reduce or shut operations during the storm to conserve power.
Automobiles. The shortages will hit the auto industry particularly hard. On Tuesday, Samsung Electronics announced it had shut down its Austin-based chip plant. NXP (NASDAQ:NXPI) and Infineon (OTCMKTS:IFNNY), two critical suppliers of the auto industry, also confirmed that they had halted operations. Automakers had already faced chip shortages, forcing companies like Ford (NYSE:F) to announce cuts of up to 20% of production. The Texas chip shortage will only make things worse.
Chip manufacturers, meanwhile, have mostly traded flat. Rising chip prices will add more significant margins, even as total revenues shrink. Analysts have left their bottom-line estimates primarily unchanged.
Insurance/Utilities. Other Texas-based companies have also felt the pinch. Insurers have seen claims spike amid the winter weather — almost 10,000 claims have already been filed, according to USAA. And the damage to public waterworks could see costly fixes needed to repair broken pipes and flooded buildings.
Jury Still Out: Green Energy
“The Green New Deal has come, believe it or not, to the state of Texas,” said Tucker Carlson, a conservative news pundit. “How’s it working out so far?” As Texans faced a natural disaster of epic proportions, several Republican officials sided with Mr. Carlson to blame Texas’ power failures on wind and solar energy. Frozen wind turbines, they claimed, were the reason behind the severe power outages.
The truth is a little more complicated. According to the Electric Reliability Council of Texas (ERCOT), 61% of the missing 46,000 megawatts of production ability came from coal, nuclear and natural gas power plants. Much of the issue came from winterizing plants and pipelines for sub-freezing temperatures, an infrequent occurrence in much of Texas. The other missing 39% came from renewables.
The PR damage, however, might have already been done. As President Biden looks to push renewable energy, a reinvigorated Republican base could stonewall the process. That would force Senate Democrats to use Reconciliation, a move that would almost certainly water down Mr. Biden’s ambitious plans to get more moderate Democrats on board.
That leaves clean energy stocks in limbo. Companies like General Electric (NYSE:GE), which makes wind turbines and natural gas ones, could win either way. But others like First Solar (NASDAQ:FSLR) with less diversification might see its share price wobble. Already, FSLR stock is down almost 10% in the past week.
Conclusion: How to Invest for Texas’ Climate Disaster
As the Texas deep freeze has reminded investors, climate disasters can affect millions with little warning. As much of the U.S. digs out of this deep freeze, winners and losers will continue to emerge. Buyer beware — this could only be the start of a greater shift in how energy gets produced.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.