Counting Katrina's Costs


As Hurricane Katrina pummeled New Orleans and other Gulf of Mexico regions on Aug. 29, crude-oil prices spiked to $67.20 due to fears of storm-related supply disruptions. Among sectors moving during the trading day, energy groups rose on oil-price strength, helping to bolster the S&P 500 index. Meanwhile, property and casualty insurers were down on concerns of losses caused by storm damage.

S&P Equity Research analysts issued opinions on various sectors and stocks the Category 4 storm could affect.

Oil Exploration and Production

Analyst Charles LaPorta maintained a positive outlook on this industry. Initial reactions to Katrina slamming into the heart of Gulf of Mexico operations have been modestly positive for names in oil exploration and production.

LaPorta has focused his optimism on large onshore natural-gas producers XTO (XTO

; ranked 5 STARS, or strong buy; recent price: $37.16) and Chesapeake Energy (CHK

; 5 STARS; $28.70), as they benefit from higher natural-gas prices with no damage, we think, to infrastructure.

He believes large-cap Gulf operators like Apache (APA

; 4 STARS, or buy; $69.90) and Devon Energy (DVN

; 4 STARS; $58) may sustain damage, but higher prices will overcompensate due to their large globally diverse field operations.

Integrated Oils and Refiners

Analyst Tina Vital maintained a positive outlook on integrated oils and refiners. October West Texas Intermediate oil prices rose $2, to near $69 today. September unleaded gasoline rose 21 cents, and September heating oil rose 13 cents on worries that Hurricane Katrina could idle Gulf refineries for weeks or months.

Oil companies, such as ExxonMobil (XOM

; 5 STARS; $58.37), Chevron (CVX

; 4 STARS; $59.30), Valero (VLO

; 5 STARS; $90.40), Royal Dutch (RDS.A

; 3 STARS, or hold; $63), and Amerada Hess (AHC

; 3 STARS; $124.40), shut down refineries (initial estimates are 12% of U.S. capacity) and evacuated offshore facilities (initial estimates are 42% of Gulf oil production and 20% of Gulf gas). If storm damage is extensive, Vital expects the market to feel Katrina's bullish price impact for months.

U.S. Oil and Gas Land Drillers

Analyst Stewart Glickman maintains a positive outlook for U.S. land drilling in Katrina's wake. With damage from the storm disrupting Gulf of Mexico oil fields, he sees U.S. land drillers as likely to benefit, given their more widely dispersed operations and higher natural-gas prices, which have now surged to more than $11 per million British thermal units (MMBtu) for September, 2005, delivery.

Among specific drillers, his top pick is Nabors Industries (NBR

; 5 STARS; $64.62), which has the second-most-active rigs on U.S. land and a growing presence in international land drilling. He also likes Patterson-UTI Energy (PTEN

; 4 STARS; $32.37), which has the most active rigs among U.S. land drillers.

Property-Casualty Insurers

Analyst Catherine Seifert has kept a neutral stance on property-casualty insurers. She expects the sector's stocks, such as Chubb (CB

; 4 STARS; $87.06) and AIG (AIG

; 3 STARS; $59.27), to come under some pressure as Katrina makes landfall.

Insurance stocks typically strengthen in hurricane season amid the belief that storm losses will drive up premium rates. But if Katrina causes serious damage to oil rigs in the Gulf, oil prices could spike. She believes that would offset any potential upside to insurance stocks. Allstate (ALL

; 5 STARS; $58) and Hartford Financial Services (HIG

; 5 STARS; $72.71) remain her top picks in the group.

Seifert expects Bermuda-based insurers to incur oil-rig and refinery-related claims from Katrina. Despite trading at price/book multiples discounted to the broader property-casualty universe, she remains cautious on these companies amid concerns over pricing and reserve adequacy.

She has a buy recommendation on shares of Aspen Insurance Holdings (AHL

; 4 STARS; $28.70) -- but recommends investors sell XL Capital (XL

; 2 STARS, or sell; $70.22).

Her hold opinions include Ace Ltd. (ACE

; 3 STARS; $44.25), Endurance Specialty Holdings (ENH

; 3 STARS; $37.53), Platinum Underwriters (PTP

; 3 STARS; $33.47), and RenaissanceRe Holdings (RNR

; 3 STARS; $45.06).

Casinos

Analyst Tom Graves maintained a neutral opinion on casino stocks. He expects the storm to hurt gaming results from the Gulf Coast and New Orleans areas. The companies he believes may be affected include Harrah's Entertainment (HET

; 3 STARS; $71.61), which has a casino in New Orleans and two casino/hotels on the southern Mississippi coast, and MGM Mirage (MGM

; 3 STARS; $42.56), which has the Beau Rivage casino/hotel in Biloxi.

However, most of Harrah's and MGM operations reside outside of the southeastern U.S. This is also the case with Boyd Gaming (BYD

; 3 STARS; $47.70), whose properties include the Delta Downs racetrack casino and Treasure Chest Casino near New Orleans.

Returns through Aug. 26 (%)

S&P 1500 Subindustry

1 Wk

13 Wks

YTD

'04

5 Yrs

Integrated Oil & Gas

-1

6.5

19.4

25.5

8.8

Oil & Gas Drilling

-0.6

18

33.3

36.6

3.4

Oil & Gas Equipment & Services

-0.3

22.3

30.4

33.6

3.3

Oil & Gas Exploration & Production

0.7

19.6

43.8

34.8

18.4

Oil & Gas Refining & Marketing

1.3

25.2

51.9

66.6

36.2

Casinos & Gaming

0.6

-4.8

-4.6

31.6

19.5

Property & Casualty Insurance

-0.2

3.6

8.1

10.2

9.1

By S&P Equity Research Analysts


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