MEXICO CITY Aug 20, 2007 (Dow Jones)
During a five-week stretch two years ago that produced hurricanes Katrina and Rita, energy equities were among the biggest winners in a flattish market otherwise spooked with concern about the effects of higher energy prices.
While virtually all boats in the ocean of petroleum stocks rose amid 2005's unprecedented battering to Gulf Coast petroleum infrastructure, there were some standouts within the vast network of companies that explore for oil, service wells and refine and distribute petroleum products.
While oil giants like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) would ultimately post new annual profit records in 2005, in part because of the storms, their valuation gains of 7% and 8% over this five week stretch were overshadowed by a range of smaller companies that posted double-digit gains.
The 2005 patterns are worth keeping in mind as the spotlight returns to the Gulf Coast amid gloomy predictions of another turbulent hurricane season over the next two months or so. After a slow start, the 2007 hurricane season at last kicked into gear this week with the sudden intensification of Tropical Storm Erin near the Texas Coast and the strengthening of Hurricane Dean, now moving into the Caribbean. Erin never reached hurricane force but did dump 7 inches of rain in some parts of Texas after making landfall. Dean, however, could be a major threat to energy infrastructure next week if its path takes it to the Gulf of Mexico.
In 2005, the biggest stock movers over a five-week stretch encompassing Katrina and Rita included companies that perform offshore repairs including Oceaneering International Inc. (OII), which rose more than 23%, and Global Industries Ltd. (GLBL), which jumped 34%. Many companies from this sub-sector continue to earn fresh revenue from storm-related work that dates back to the 2005 storms and to 2004's Hurricane Ivan.
Also recording outsized gains during the September 2005 storm stretch were onshore natural gas producers Chesapeake Energy Corp. (CHK), which rose 40%, and EOG Resources Inc. (EOG), jumping 22%. These companies, which aren't heavily leveraged to the Gulf of Mexico, garnered all of the benefits, but virtually none of the pain, from higher commodity prices due to offshore production outages. Many offshore producers, including Apache Corp. (APA), also gained during this stretch, but not by as much.
The other notable winners in 2005 were independent refiners, which benefited from a severe gasoline supply crunch wrought from huge impairments to the domestic refining industry. As consumers balked at high gasoline prices after Katrina and Rita struck, leading refiners gained billions of dollars in market value. For example, Valero Energy Corp. (VLO), which sustained storm damage at plants in Louisiana and Texas, gained 28%.
Energy experts point to some important caveats when it comes to trying to orient an energy portfolio around hurricane season. The biggest is that while energy markets are primed for a busy season after the 2004 and 2005 seasons, most hurricane seasons do not produce lengthy outages or significant physical damage to assets. That means that even if equities surge on initial storm headlines, the gains will vanish once the market realizes the storm is a nonevent.
Another wild card is how energy equities will be affected by the recent uncertainty in the broader market. Energy equities have lost about 10% of their value over the last month, slightly worse than the 9% decline in the S&P 500. On Friday, the Dow Jones U.S. Oil and Gas Index was up nearly 3% on the strengthening Dean forecast, almost twice the increase posted by the S&P 500.
Most experts see the 2005 buying trends as a reliable barometer for 2007, at least as far as momentum buying. "I would tend to expect the same thing, at least on a short-range basis," said James Halloran, an energy investor with National City Private Client Group in Ohio. "If you get a really bad storm, the perception is you will want to be in the stocks that repair things" and then those that are leveraged directly to the commodities, such as producers and refiners.
"It's essentially symmetrical," Art Smith, chief executive of energy consultant John S. Herold Inc., said of the risk-reward effects from hurricanes on petroleum sub-sectors. In other words, while integrated giants like Chevron and ExxonMobil garnered only modest valuation gains in 2005, their declines were tempered when the 2006 season produced no major storms, helping to push energy commodity prices - and most energy equities - lower.
One critical difference this year compared with 2005 is the brittle state of natural gas markets. Natural-gas storage levels currently sit 16% above the five-year average, an overhang that has some market watchers fretting that producers and many oil services equities could plummet if the 2007 hurricane season is uneventful.
"Meaningful shut-ins," or production outages, will be needed to address the glut in the current gas market, said David Pursell, a principal at Tudor, Pickering & Co. Securities, Inc. Otherwise, "gas is going lower," Pursell said.
If major storms do hit this year, oilfield contractors that repair infrastructure will likely have to rejigger their operations to meet new demands. Oceaneering, which inspects offshore pipelines and supplies remotely operated vehicles, among other services, is still removing debris and plugging well sites abandoned after the 2004 and 2005 seasons, said Jack Jurkoshek, director of investor relations.
"For sure, we're at capacity," Jurkoshek said. "We are still involved in cleanup related to Ivan even now." But Jurkoshek said some of this work would be deferred for more pressing operations from a fresh storm, such as restoring production.
Another bout of storms would instantly set new priorities in the Gulf, probably resulting in even higher rates for many of Oceaneering's products and services, he added. In 2005, Oceaneering stock rose from $42.68 about a week before Katrina to $53.41 a couple of days after Rita. But in 2006, which produced no major storms, Oceaneering shares fell from $38.08 to $30.80 over a similar five-week stretch.
Jurkoshek notes that Oceaneering is also a leader in some other leading oilfield sectors not leveraged to hurricanes, including the hot subsea business, which allows production of smaller offshore fields. "Our growth model for this company is not predicated on hurricanes," said Jurkoshek, who declined to comment directly on stock movements. Still, he added, "We have made a lot more money from hurricane-related work than we could have dreamed of right after the storms."
Copyright (c) 2007 Dow Jones & Company, Inc.
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