What happened
The epicenter of the U.S. oil and gas industry experienced a devastating blow this week as Hurricane Harvey plowed through Houston, leaving massive destruction in its wake. While the region is still tallying up the toll from that storm, one of the major impacts is that as much as a quarter of the country's refining capacity went offline, which is causing gas prices to spike. In addition to that, the industry temporarily shut down a portion of the output from the Gulf of Mexico as well as slowed drilling activities in the Eagle Ford Shale. These factors could have a significant impact on the oil market in the weeks ahead as the industry works to get everything sorted out.
While that near-term uncertainty weighed on much of the energy market this week, it also shined a light on companies that stand to benefit from the current market dislocation. Smaller refining-related companies that operate away from the country's energy center soared this week, according to data from S&P Global Market Intelligence. Here's a look at why investors piled into these stocks.
Image source: Getty Images.
So what
Leading the charge higher this week was Calumet Specialty Product Partners (CLMT 5.43%), which rallied more than 30%. Fueling those gains is the fact that the company, which is one of the leading independent producers of specialty hydrocarbon-based products such as lubricants, asphalt, and fuels, primarily operates away from the Gulf Coast. Because of that, Calumet Specialty Product Partners hasn't experienced any outages due to Harvey and will likely capture higher margins for its products in the near term as rivals work to get back up and running. However, it's worth noting that the company recently struck a deal to sell its refinery in Wisconsin, which will limit its ability to fully capitalize on future market dislocations.
Meanwhile, independent refiners PBF Energy (PBF 1.49%), CVR Energy (CVI 1.78%), and Delek US Holdings (DK 0.51%) also jumped double-digits this week because all three operate away from the Houston area. In PBF's case, only one of its five refineries is on the Gulf Coast, though that facility is in New Orleans, so it hasn't experienced any Harvey-related issues. Meanwhile, Delek's owns two refineries in Texas and one in Louisiana, but all three are away from the coast. Because of that, analysts at Goldman Sachs listed both PBF Energy and Delek US Holdings as two of the companies that will likely see a near-term margin boost from the storm. Likewise, neither of CVR Energy's two refineries are near the Gulf Coast, so it could also capture higher margins while Houston area refineries remain offline.
Finally, ethanol producer Pacific Ethanol (ALTO 0.53%) also rose sharply this week, jumping more than 17%. Fueling that rally is the fact that Pacific Ethanol services refining markets in the Midwest and West Coast, which will likely benefit from the hurricane impact. That's because refineries in those regions will likely operate as close to full capacity as possible until those around Houston are back up and running, which could fuel higher demand for the biofuels that Pacific Ethanol produces.
Now what
The market reacted quickly this week and repriced refining stocks to reflect the potential impact from Hurricane Harvey. Companies that operated away from Texas stand to benefit from the storm's impact, which is why their stocks shot up this week. That said, these companies will only likely experience a short-term boost since no major Houston-area refinery appears to have sustained any significant damage.
Unfortunately, that's not the case for other parts of Houston, which experienced unimaginable devastation this week. While it will take the region quite some time to rebuild, we all hope it rebounds quickly and comes back stronger than ever.
