Hurricane Harvey has caused untold catastrophe in Texas over the past week with extreme flooding from the first major hurricane to hit the United States since 2005.
While relief and recovery efforts continue and attempts to assess the extent of the damage are on-going, asset managers have looked at what ramifications there currently are for both bond and equity markets.
Noah Barrett, energy and utilities analyst at Janus Henderson, said the hurricane had severely impacted large swathes of the United States’ energy refining capacity. This is because a large proportion is based on the Texas coast.
‘While all segments of the energy sector’s value chain have been affected, we believe the brunt will be in the downstream segment - refining, processing, marketing and distribution. It is currently estimated that roughly 15% of US refining capacity, which represents 3% of global crude demand, is offline.’
Barret said, while most of this would have been closed as a pre-emptive measure, the sheer size of the storm means the volume of oil currently offline could grow. Conversely, upstream companies in the production area are well-versed when it comes to extreme weather and would be expected to ramp up efforts quickly once the weather normalises.
‘Unlike many storms, however, Harvey has led to a meaningful curtailment of onshore oil and gas production, namely in the Eagle Ford shale formation. Overall, roughly 11% of US crude production and 3% of gas production is offline at present. As onshore production tends to recover more rapidly than offshore, we expect the impact to crude and gas supply to be fairly limited.’
Barrett added that midstream transport and storage companies could be hard hit and be slow to return to business as usual, while several refineries may need repairs. ‘Accordingly, downstream operators with capacity outside of the Gulf region should stand to benefit, with stocks of these companies initially higher in the trading hours after the storm made landfall.’
In a note on Twelve Capital’s website, Ramseier said it is too early to make accurate loss estimates given the hurricane is still active. He highlighted how flood loss would largely be covered by the National Flood Insurance Program but added that businesses being closed would cause heavy losses.
‘Currently, information provided by the catastrophe model agencies indicate that cat bonds are unlikely to have been affected by the hurricane. It will take a few weeks until final loss estimates are available.
‘Some Private ILS [insurance-linked securities] contracts are exposed to this event as well. With regard to insurance debt, the event is not expected to adversely impact the credit positions of the listed re/insurers we are invested in given that standalone, this will largely be an earnings event as opposed to capital erosion.
‘For insurance equity, the greatest uncertainty remains with the extent of flooding damage and business interruption. This may erode 2017 earnings for some of the more exposed businesses,’ Ramseier added.