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An Opportunity To Buy Flooded Refiners
Nothing wreaks more havoc on the commodities markets than weather. For the U.S. oil and gas industry, hurricane season represents a tense period. A mild season and everything is gravy for the offshore producers, but when there are Hurricane Katrina-like conditions the industry can see catastrophic losses. It is during this time that long-term investors can pick up some bargains, while E&P stocks in the Gulf are cheap. Hurricane season hasn't officially started, but devastating weather in America's south could open up some bargains in another sector of the oil industry.
TUTORIAL: Commodity Investing 101
Filling the Flood Plains
Strong rains have taken their toll on the much of the nation's heartland. The rains have caused the Mississippi River to swell to dangerous and epic proportions. The torrential rains have caused the overall river to reach water levels not seen since the 1920s and 1930s. The river, which is three miles wide in some sections, has already flooded more than 100,000 acres of crops and has caused thousands to evacuate their homes. The river crested last week in Memphis at nearly 48 feet or about 14 feet above flood stage. This was just a few mere inches below all-time records. Meteorologists expect the flood crest expected to reach New Orleans in less than two weeks.
Aside from the humanitarian disaster, the potential for an energy disaster is brewing as well. There are 11 refineries in Louisiana that are vulnerable to shutdowns later this month due to the flooding. These refineries represent nearly 13% of total U.S. refining capacity or 2.5 million barrels per day. In 2005, when Hurricane Katrina hit Louisiana, it took nine refineries completely offline. Both refinery operators and investors are waiting with bated breath to see the extent of the damage. Refinery shares have sold off in the wake of the cresting waters.
However, the flooding may not be as bad as some expect. According to analysts, a big, Katrina-like event is unlikely and concerns over potential flooding disruptions to major refineries have eased. In addition, restarting these facilities after the flood should take days, rather than the weeks that it took after Katrina. Finally, the U.S. Army Corps of Engineers has opened pieces of the Morganza Spillway, relieving much of the danger from the refineries.
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Buying the "Act Of God"
The recent overall market jitters have added to the flood pressures on the refiners' shares. Nevertheless, while tragic, the overall situation most likely won't be as a bad as some fear. Investors wanting to add the overall energy sector can use a proxy like the iShares Dow Jones US Energy (NYSE:IYE). However, there are plenty of individual refining bargains.
The largest refinery in the region is Exxon Mobil's (NYSE:XOM) Baton Rouge facility. The plant, which has a capacity of about 505,000 barrels a day, is the second-largest refinery in the U.S. Currently, the docks at Exxon's refinery are flooded and are closed, but continue to operate as normal. Opening the Morganza Spillway virtually guaranteed the safety of the refinery. The second-largest refinery in the region, belonging to Marathon Oil (NYSE:MRO), has also been protected via the spillway opening. The two major oil companies represent a great opportunity to buy some refining assets on the cheap.
Pure-play refiner Valero (NYSE:VLO) is also an interesting choice. After hurricanes Katrina and Rita, the company implemented changes at its facilities to make them more resistant to flooding. This included moving electrical equipment higher and building its own systems of emergency levees.
For those looking for a more risky refining flood play, Alon USA Energy (NYSE:ALJ) 80,000-bpd Krotz Springs plant sits directly in the evacuation zone of the opened Morganza. Depending on how bad flooding gets, Alon could represent a risky value play.
Finally for those looking for a different angle on the flooding, when Hurricane Katrina came into Louisiana, it took nine refineries offline. That lost capacity, caused gasoline prices to rise almost 50 cents per gallon between August 29 and September 5. The United States Gasoline ETF (NYSE:UGA) can be used by investors to bet on rising gas prices.
Bottom Line
The rising waters of the Mississippi River are causing a major headache for the refiners. The flooding has the potential to severely damage the refining infrastructure of the nation. However, fortune favors the bold. For investors wanting to add some long-term assets, now may be the time to add the refiners' shares.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: Commodity Investing 101
Filling the Flood Plains
Strong rains have taken their toll on the much of the nation's heartland. The rains have caused the Mississippi River to swell to dangerous and epic proportions. The torrential rains have caused the overall river to reach water levels not seen since the 1920s and 1930s. The river, which is three miles wide in some sections, has already flooded more than 100,000 acres of crops and has caused thousands to evacuate their homes. The river crested last week in Memphis at nearly 48 feet or about 14 feet above flood stage. This was just a few mere inches below all-time records. Meteorologists expect the flood crest expected to reach New Orleans in less than two weeks.
Aside from the humanitarian disaster, the potential for an energy disaster is brewing as well. There are 11 refineries in Louisiana that are vulnerable to shutdowns later this month due to the flooding. These refineries represent nearly 13% of total U.S. refining capacity or 2.5 million barrels per day. In 2005, when Hurricane Katrina hit Louisiana, it took nine refineries completely offline. Both refinery operators and investors are waiting with bated breath to see the extent of the damage. Refinery shares have sold off in the wake of the cresting waters.
However, the flooding may not be as bad as some expect. According to analysts, a big, Katrina-like event is unlikely and concerns over potential flooding disruptions to major refineries have eased. In addition, restarting these facilities after the flood should take days, rather than the weeks that it took after Katrina. Finally, the U.S. Army Corps of Engineers has opened pieces of the Morganza Spillway, relieving much of the danger from the refineries.
The recent overall market jitters have added to the flood pressures on the refiners' shares. Nevertheless, while tragic, the overall situation most likely won't be as a bad as some fear. Investors wanting to add the overall energy sector can use a proxy like the iShares Dow Jones US Energy (NYSE:IYE). However, there are plenty of individual refining bargains.
The largest refinery in the region is Exxon Mobil's (NYSE:XOM) Baton Rouge facility. The plant, which has a capacity of about 505,000 barrels a day, is the second-largest refinery in the U.S. Currently, the docks at Exxon's refinery are flooded and are closed, but continue to operate as normal. Opening the Morganza Spillway virtually guaranteed the safety of the refinery. The second-largest refinery in the region, belonging to Marathon Oil (NYSE:MRO), has also been protected via the spillway opening. The two major oil companies represent a great opportunity to buy some refining assets on the cheap.
Pure-play refiner Valero (NYSE:VLO) is also an interesting choice. After hurricanes Katrina and Rita, the company implemented changes at its facilities to make them more resistant to flooding. This included moving electrical equipment higher and building its own systems of emergency levees.
For those looking for a more risky refining flood play, Alon USA Energy (NYSE:ALJ) 80,000-bpd Krotz Springs plant sits directly in the evacuation zone of the opened Morganza. Depending on how bad flooding gets, Alon could represent a risky value play.
Finally for those looking for a different angle on the flooding, when Hurricane Katrina came into Louisiana, it took nine refineries offline. That lost capacity, caused gasoline prices to rise almost 50 cents per gallon between August 29 and September 5. The United States Gasoline ETF (NYSE:UGA) can be used by investors to bet on rising gas prices.
Bottom Line
The rising waters of the Mississippi River are causing a major headache for the refiners. The flooding has the potential to severely damage the refining infrastructure of the nation. However, fortune favors the bold. For investors wanting to add some long-term assets, now may be the time to add the refiners' shares.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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