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Rita's Impact: Gone with the Wind

By Isabelle Sender As Hurricane Rita hits the Texas and Louisiana coastlines, Standard & Poor's analysts say the storm will likely punish petroleum and petrochemical companies only in the near term -- and may even present enhanced buying opportunities. Rita, which is threatening oil-production disruptions in the Gulf of Mexico, forced the evacuation of 1.3 million people from Texas and Louisiana.

Rita comes as a second blow to the oil and gas sector as companies close down a good portion of operations -- sometimes within days of reopening them after Hurricane Katrina-related shutdowns. For those companies that are continuing to operate, risks of power outages and logistical challenges compound any overall damage by Hurricane Katrina last month.

STOPPED FOR NOW. The American Chemistry Council said more than 160 chemical manufacturers in Texas, representing half of the nation's chemical production, lie in the potential path of the storm. Meanwhile, the Gulf produces 29% of the nation's oil and 19% of its natural gas.

According to the Minerals Management Service, the vast majority of offshore producers have halted their production. As of Sept. 22, 92% of Gulf oil production had been shuttered, while 66% of natural-gas production was closed down.

With about 18 refineries in the path of Rita, companies like ExxonMobil (XOM

; ranked 5 STARS; recent price: $65), BP (BP

; 4 STARS; $72), Royal Dutch Shell (RDS.A

; 3 STARS; $66), Valero Energy (VLO

; 4 STARS; $112), Marathon (MRO

; 4 STARS; $70), and ConocoPhillips (COP

; 5 STARS; $69) have initiated shut-down procedures.

WORST-CASE SCENARIO. October gasoline futures on the New York Mercantile Exchange are up about 16%, and Henry Hub natural gas has risen about 14% since Sept. 16, the Friday before the National Weather Service started tracking Rita. Heating oil is up more than 9%, and West Texas Intermediate crude oil for November delivery has increased more than 5% -- illustrating concerns about refining capacity and locally produced natural gas.

"Overall, we estimate that the resulting price and margin increases for refiners will more than offset the possible related volume losses from the storm," says S&P oil and gas equity analyst Tina Vital. In addition to ExxonMobil, her top refining picks include ConocoPhillips and Valero Energy.

Vital calculates that approximately 4.3 million barrels per day of U.S. refinery capacity was down or in the process of closing as of early afternoon on Thursday. That translates into about 25% of total U.S. capacity, including about 5% still shut down from Katrina. Vital thinks the worst-case scenario would mean about 30% of total U.S. capacity temporarily shut down because of the two storms.

"WEEKS AT THE MOST." As for chemicals, suspension or shutting down plants at the center of the petrochemical industry will obviously affect production, says S&P's chemical equity analyst Richard O'Reilly. But he believes disruptions spanning several days are likely to have only a short-term negative influence on the companies he covers.

"We may be talking days or weeks at the most, unless plants are damaged," O'Reilly says. "In my experience, that's all it takes. In post-Katrina analysis, some of the most important negative implications were based on real extensive damage to plants and how long it would take to resume normal operations," he explains.

Many of the companies that O'Reilly follows have sold off in recent weeks because of Katrina, and he views the pullback as an enhanced buying opportunity for certain names. For instance, Dow Chemical (DOW

; 5 STARS; $40), which has a manufacturing complex in Hurricane Rita's way, looks quite attractive as it flirts with a 52-week low. Sender is a reporter for S&P MarketScope

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