Disasters like Hurricane Harvey inflict misery on millions of people. The market's cold logic also means they boost profits for a relative few.
With Harvey having swung back onshore, roughly a fifth of America's oil-refining capacity was shut down or in the process of doing so as of Thursday morning. Almost another sixth was running at reduced rates. With so much of the industry offline, refining margins have jumped:
And where margins go, so go stocks:
Clearly, the gains aren't distributed evenly. Refiners that have had to shut down plants along the Gulf Coast, such as Valero Energy Corp. and Phillips 66, aren't in a position to fully capitalize on those higher margins. Conversely, companies such as HollyFrontier Corp., which has plants further inland and in the West, and East Coast-focused PBF Energy Inc. are viewed as likely to earn a windfall.
How big that windfall really is, though, is a key question for those bidding the stocks up by 15 to 20 percent in the space of a week.
It's worth bearing in mind that even Harvey's catastrophic floods, taking an estimated 3.9 million barrels a day of capacity completely offline, haven't pushed margins to the levels seen during the obvious comparable storms, namely Katrina and Rita. Back then, benchmark Gulf Coast crack spreads spiked to almost $60 a barrel at one point, versus the current level of about $25, which is also about $10 lower than the levels seen when Ike hit in 2008:
That spike may well climb from here, especially as Harvey hits the Texas-Louisiana border -- another big refining center.
Yet the other observation to take away from those prior hurricanes is how briefly those high margins held; they were, after all, spikes rather than plateaus. This experience hasn't been lost on the region's refiners. Despite Harvey's unprecedented deluge, plants in Corpus Christi, the first area to be hit, may be back up and partly running as soon as this week. And as I wrote here, Harvey has also hit demand for fuel in the area affected, and that may take weeks to recover while the waters recede and local businesses and residents start piecing their lives back together.
Which is why the pronounced jumps in some stocks may turn out to be overdone. Barclays analysts recently compared the change in market caps of refiners to their output over a theoretical 30-day period of disruption, as a way of quantifying what investors are assuming.
Take HollyFrontier as an example. Its refineries can process 457,000 barrels a day. Assuming it runs them hard at 95 percent utilization, that equates to just over 13 million barrels processed in 30 days. In the past week, its market cap has risen by $723 million. On a pre-tax basis -- share prices relate to net income, after all -- that implies $1.1 billion of theoretical profits -- or a windfall of $85 a barrel for those 30 days.
Granted, this is a pretty crude calculation that doesn't take account of potentially longer-lasting impacts on margins due to, say, unexpectedly bad damage at competing refineries or (heaven forbid) another big storm showing up.
Even looked at another way, though, the jump in value looks overdone. Based on HollyFrontier's pre-Harvey multiple of Ebitda, 7.5 times, the implication is that it could add $148 million of Ebitda in the space of a month, equivalent to 17 percent of the existing consensus forecast for the whole of 2017, based on data compiled by Bloomberg.
Harvey isn't done yet. But some of these refining stocks look priced as if he will stick around for weeks and weeks.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Mark Gongloff at email@example.com