Hurricane Harvey has materially impacted the Southeast causing significant upheaval for many individuals, families and communities who have been in its path. These impacts will be long lasting and in some cases irreversible. However, we believe the market impact from this event will be much more transitory and smaller in scale than the personal toll that has been taken. Since this event is limited to a certain geography, there are two aspects that most acutely impact our clients: the Master Limited Partnership (MLP) and energy market and regional municipal bonds.
MLP and the Energy Market
While there has been a tremendous impact to the Gulf Coast energy markets over the past days, we view the impacts as largely transitory. Based on what we know so far, the impact has been limited to downtime resulting from downstream markets closing in advance of the hurricane rather than as a result from damage during the storm. This should contain the impact to supply of these products and the revenue to these companies to the third quarter of 2017 and will likely result in minimal associated costs. The fact that the downstream refineries and petrochemical facilities were able to safely bring down their facilities in advance of the storm will also likely limit the amount of downtime.
Supply & Demand Impact:
- ~2.5 million barrels / day1 of refining capacity was taken offline in advance of the storm
- 300 – 500 thousand barrels / day1 of Eagle Ford production has been shut down due to flooding
- Major ports including the Houston Ship Channel and the Port of Corpus Christi were closed due to the storm limiting exports/imports
- This may result in higher refined product imports in the short term as they are used to fill any deficits resulting from the storm
While there may be short-term effects such as higher prices for certain products and/or reduced earnings for companies affected, these impacts are likely short lived and should not affect our long-term expectations for MLPs or energy related assets.
Municipal Bond Market Impact
While many communities have been materially impacted by the storm, the market’s reaction to bond prices has been fairly muted. Texas carries a ‘AAA’ rating from both S&P and Moody’s and in the last 75 years, no natural disaster has led to the default of a municipal bond2,3. Therefore, we believe it is unlikely Texas will be an exception to the precedent. Short and long-term aide from the state of Texas, FEMA and potentially the federal government are all supportive elements to municipal bond ratings. By way of example, Moody’s downgraded 29 credits in in the wake of Katrina only to later upgrade 46 credits in the New Orleans region a year later3. While the impact from Harvey and Katrina may be different, we believe they carry similar parallels in supporting fixed income bond ratings.
Within Harris County (Houston’s home), there are approximately $67 billion of general obligation and revenue bonds outstanding4. While there may be softness in utility and transportation securities, long-term adverse repercussions are not expected at this time as many of those issuers carry insurance and healthy reserves to meet debt service payments. Additionally, local school district bonds may face some challenges, though most carry an additional security backed by the Texas Permanent School Fund, which again, hasn’t resulted in any sort of negative pressure in the prices of those bonds.
For nationally focused municipal bond portfolios, Texas occupies approximately 9% of the total municipal bond market and it is estimated that the impacted area around Houston comprises approximately 25% of the muni credits in Texas4. For that reason, negative impacts on municipal portfolios is expected to be minimal.
While there is no way to downplay the impact to communities affected by this event, we believe the market impact is likely to be transitory and minimal. As more information becomes available in the wake of the storm we will continue to assess the impact. However, in the short-term we see little reason for substantial action within portfolios.
Contact New England Investment & Retirement Group
If you have any questions, please contact your financial advisor at (978) 975-2559.
1. Tortoise Capital Advisors
2. S&P Global Ratings