Key Points
- Hurricane Isaias showed that storm impacts on energy stocks depend on asset location, revenue diversification, and exposure to widening crack spreads.
- Chevron shares rose about 4% in the past month after Isaias proved less damaging than feared, while diversified Phillips 66 gained 14%.
- The VanEck Oil Refiners ETF, up roughly 80% year to date, benefits from global diversification and tighter refined markets caused by Gulf Coast disruptions.
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Hurricane season in the United States can be a major driver of volatility in the energy sector, though investors tend to overlook nuances that can leave some companies heavily affected while others are barely scathed. When storms threaten the Gulf Coast, there is always a possibility of refinery closures, disruptions to production, infrastructure damage, and resulting increases in prices at the pump. Early October's Hurricane Isaias was a recent demonstration of how predicting the impacts of these events can be difficult.
While forecasts initially called for Isaias to impact a wide area of Gulf Coast refineries, as landfall approached the projected impacted refinery capacity shrank considerably. For investors, the disruption to energy companies in the area may ultimately have been less than expected, but the lessons on how to seek opportunities remain. The impact of a hurricane on any specific company tends to come down to where its assets are located, how diversified its revenue streams are, and whether it can capture the widening crack spread that often occurs after refining capacity is reduced.
Isaias Didn't Need to Destroy Refineries to Disrupt the Market
As Isaias demonstrated, even if a hurricane doesn't do as much damage as initially anticipated, it can still cause bumpiness in the energy market. Companies may opt to reduce production or even shut down portions of their business preemptively. Investors were watching facilities like Chevron's (NYSE: CVX) in Mississippi, a major domestic refinery that faced potential flooding or outages as a result of the storm.
While CVX shares remained flat from late September to Oct. 7, they quickly climbed as it became clear that Isaias would likely do less damage than originally expected. CVX is up about 4% in the last month.
By contrast, shares of rival Phillips 66 (NYSE: PSX) have risen 14% in the last month, a sign of investor optimism in a company that was less likely from the beginning to be affected by Isaias' path.
Phillips is a nuanced play in a scenario involving a Gulf Coast hurricane, given its diversified business lines. The company has refining, midstream, chemicals, and other businesses, some of which are significantly more exposed to risk from a hurricane than others.
While PSX shares are up an impressive 125% year to date (YTD), this performance largely reflects the crack spread expansion that has benefited refiners broadly amid the ongoing Iran conflict rather than a specific response to Isaias or other weather events. Phillips' midstream business is critical because it provides cash flow that is based primarily on fees, not on the price of crude—and this may make PSX more stable in the case of future hurricanes.
Chevron's Crude Production Could Be Interrupted, But at What Cost?
Aside from Chevron's Mississippi assets, the company's deepwater Gulf of Mexico operations also face the risk of temporary shutdowns during severe storms in the area. This has the potential to impact not only the company's refining operations but also its crude production volumes.
Still, with crude as costly as it is, the impact to the company's revenue from a brief production interruption is less damaging—and indeed a crude price spike following a hurricane, as in the case of Isaias, helps to reduce that damage further.
CRAK Benefits From 3 Distinct Tailwinds
The VanEck Oil Refiners ETF (NYSEARCA: CRAK) is an exchange-traded fund (ETF) that holds a basket of global oil refiner stocks, with domestic names making up just 35% of the portfolio. Even if those stocks are impacted by a North American hurricane, the bulk of the portfolio will be unaffected.
At the same time, virtually all of the companies in CRAK's collection will benefit from a tighter global refined market caused by U.S. Gulf Coast disruption. Potential setbacks for domestic refiners may mean a boon for international rivals.
CRAK's net assets have surged dramatically this year as investors have capitalized on wide crack spreads and rapid share price increases in refiners.
The fund has year-to-date returns of about 80%, which makes its fairly high expense ratio of 0.61% much more tolerable.
Not all of the current tailwinds—limited supply due to the Iran war, elevated crack spreads, and Gulf Coast capacity reduction—may continue over the long term.
Crack spreads tend to normalize within a few weeks of a U.S. hurricane, so investors new to CRAK should keep in mind that they may be buying after the Iran war has delivered significant returns and as hurricane season nears its end for the year.
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