With almost one-quarter of the country's oil supply coming from the Gulf of Mexico and nearly 10% of the nation's refining capacity in the vicinity of Louisiana, the impact of Hurricane Katrina upon the energy sector will no doubt be significant. After all, oil, gasoline, and natural gas are useful only when they're able to reach consumers. They do no one any good sitting around in storage tanks or underground.
How energy gets around
There are several routes by which oil and gas make their way from the wellhead to the consumer. Crude oil is generally transported to storage areas and refineries through pipelines or by large tanker ships. Once refined into gasoline or other by-products, a maze of pipelines crisscrossing the country takes over and transports considerable volumes. Trucks form the last component, with tanker rigs transporting the gasoline from sites on the pipeline to outlying communities in a sort of hub-and-spoke system.
In the immediate wake of the disaster, this distribution system was sorely tested. Gas prices around the country spiked as both refineries and pipelines went offline. In fact, in some areas of the Southeast, gasoline was hard to come by for a couple of days --including areas like Memphis (400 miles north of the Gulf) and northern North Carolina (some 850 miles northeast of the Port of New Orleans) -- and police were called out to guard the pumps in some areas. As power is restored to the Gulf Coast, though, some of these distribution problems should ease up or go away entirely.
Pipelines are unquestionably one of the most important links in the fuel distribution system. They can handle high volumes at a relatively low expense, and many investors have profited nicely over the years from the dividends produced by well-run pipeline companies and limited partnerships.
With the damage that Katrina inflicted upon the Gulf Coast, several pipelines went offline. While the pipelines themselves don't appear to have sustained damage, the pumping stations along the pipelines have been unable to move the fuel through the pipes without electricity. Fortunately, major pipelines like the Colonial Pipeline and the Plantation Pipeline (co-owned by Kinder Morgan EnergyPartners
Many pipeline operators like Loews
Although it will likely take weeks, if not months, for Gulf energy production to return to normal, most pipeline operators should see briefer interruptions. The Mississippi Delta is not the only point of entry for the pipeline system. And as companies around the country adjust to the situation, pipeline volumes should normalize.
That said, there could very well be an opportunity for other operators like TransCanada
For investors holding shares in pipeline companies, I'd strongly encourage them to carefully review information that pertains to where the pipelines run, how they get paid for volume, and where they source most of their volume. While pipelines that are solely dependent upon the Gulf Coast for their volume could see problems, those with alternative supply sources should be able to reroute operations around the affected area.
Although shipping companies haven't reported any significant damage from the storm, they did temporarily lose access to a major port. In the immediate aftermath of the storm, the Louisiana Offshore Oil Port was offline. A deepwater port, the LOOP generally handles about 1 million barrels of oil per day (approximately 10% of U.S. imports) and has pipeline connections to roughly 35% of the country's refining capacity. With power largely restored, though, the LOOP should soon be unloading tankers on a more normalized schedule, and disruptions to the shipping sector should soon be remedied.
For at least the short term, shipping companies could see some benefits from the storm.
Because power outages took some pipelines offline and the storm damaged a major port, the U.S. government decided to temporarily waive rules that prevent foreign-flagged ships from carrying goods from one U.S. port to another. As a result, shipping spot rates have moved higher as some companies try to work around the storm disruptions by hiring ships.
Even if they themselves do not end up carrying much cargo between U.S. ports, shipping companies with leverage to spot rates should see some benefit. This includes companies such as Overseas Shipholding
It's difficult to say whether this bump in rates will be persistent, although rates were expected to increase in the second half, anyway, as part of a seasonal pattern. My hunch is that the need for moving products like gasoline around ad hoc on ships will be temporary, since the pipelines are already getting back to near-normal operation. There could, however, be a more persistent need for dry-goods shipping capacity, since the Port of New Orleans has always been a major mover of commodities including coffee, lumber, and cotton. That cargo may need to be divided up among multiple other ports.
It's unlikely that the storm will present any major long-term disruptions to the transportation side of the energy sector. As of this writing, many pipelines are already up and running and simply waiting for supply to be restored to normal levels. What's more, this event will do nothing to reduce the need or demand for energy, nor its price.
While natural disasters like Katrina are obviously a shock to the system, most good companies are prepared and able to work around the disruptions. Don't let stories about the magnitude of the damage sway your investing philosophy too much. More often than not, conditions return to normal faster than anyone could imagine in the midst of the aftermath. Consequently, don't lose sight of sound, core investing principles -- that is, locating strong and competitive companies trading for reasonable valuations.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).