Will Hurricane Harvey affect MLPs?
Driving down the Texas coast at night reminds me of being a child in the back of my mom’s car during Christmas. The refineries are lit up like homes during the holidays and are impossible to miss. As the world watches on in shock, our hearts are with Houstonians. The people affected by this tragedy are far and away more important than the infrastructure in the area, but since MLPs are our business, we’re going to address a few questions we’ve had in regards to Hurricane Harvey’s impact on the space.
Due in large part to uncertainty regarding additional flooding, it’s hard to pin down when we might see South Texas refineries come back online. At present, the majority of refineries in the area are closed. We’re seeing a slight increase in natural gas prices, but a fall in crude prices. We expected that both natural gas prices and crude oil prices would increase following this event. Some believe we’ll still see crude oil prices rise for the same reason we’re seeing natural gas prices rise: with so many refineries shut down, the supply will be lower. Others say that the storm has crippled demand in Houston (America’s fourth largest city) and the decrease in demand will outweigh the temporarily lowered supply.
It’s clear that many MLPs are not in a “business as usual” mode. We’ve been following many press releases from MLPs announcing closures of crude oil pipelines in the Houston area. For example, Magellan Midstream Partners (MMP) has given daily operational updates over the course of the storm. At current, in addition to pipeline closures, marine terminal operations are also suspended due to closure of the Houston Ship Channel. MMP also notes that it has reversed a segment of its pipeline system to provide services from Oklahoma refineries into Dallas. Other press releases of note are those released by American Midstream Partners (AMID), Enterprise Products Partners (EPD), ONEOK, Inc (OKE), and Targa Resources Corp (TRGP).
There are a variety of other energy related issues at play. For one, imports and exports are currently on pause in affected areas due to port closures. Furthermore, because of the inability to move product to the Houston area, drilling suspensions have begun in the Eagle Ford. Also in the news are reports of gas leaking from storage tanks. Many energy stakeholders are wondering if Hurricane Harvey has exposed a critical energy risk. And, while this is a fair question, from reading MLP press releases, it seems that overall impact at this point has been relatively minimal compared to what some may have expected. However, until the water level goes down, a full assessment cannot be taken.
Interestingly, in the wake of other major hurricanes (think Ike in 2008) the American Petroleum Institute (API) issued standards designed to improve structural reliability during Gulf Coast hurricanes. From a financial standpoint, MLP assets are covered under insurance policies as well as business interruption insurance policies that typically cover loss of income. With initial reports being generally positive, there is optimism for a quick recovery of normal operations.