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Raymond James: More Precautions Taken for Hurricane Season

The offshore industry has taken more precautions to prepare for hurricane season, but as it continues to recover from last year, a stormy season could provide a "meaningful catalyst" for commodity prices, especially natural gas, Raymond James energy analysts said in their latest Stat of the Week.

"Assuming this year's hurricane season is more moderate, the expected amount of damage would, of course, be lower," wrote analysts J. Marshall Adkins and John Freeman. "With the memories of 2005 still fresh, the offshore industry is also taking better precautions. Part of the reason is economic. In 2004 and 2005, the industry paid an average of $450 million in insurance premiums per year, and costs have skyrocketed up to 400% for coverage of offshore property and equipment and business interruption. In the face of soaring premiums, many companies are strengthening infrastructure and implementing platform procedures to soften the blow from potential storms."

Noble Corp., they noted, installed trackers on its mobile rigs to pinpoint the location, direction and speed of rigs when storms pass through the Gulf of Mexico (GOM). It also installed back-up systems to observe wind and vessel movement, along with other environmental activity. Noble and others enhanced the safety of jackup rigs and their evacuation processes, and most rigs have strengthened mooring lines.

"One side effect of this increased caution is the likelihood that producers will cease operations and protect equipment a little earlier this year," the analysts said. "This means the development of any named storm will likely lead to reduced gas production regardless of any actual damage incurred."

Hurricane Katrina, said the analysts, formed over waters that were two to three degrees F above historical average surface temperatures. The National Oceanic and Atmospheric Administration (NOAA) estimates "current surface temperatures are immaterially higher than average and should stay at these levels for the remainder of 2006, which supports the prediction that the upcoming hurricane season will be less severe than that of 2005."

Adkins and Freeman said oil prices will remain "relatively unaffected" by severe weather this summer. But natural gas spiked more than 40% to $14/Mcf in the aftermath of Katrina and Rita.

"However, we note that the NOAA assigns only 47% to the probability that a major hurricane will hit the Gulf Coast and 64% to the chance that a major hurricane will make landfall on the East Coast. Examining the probabilities, this means that any bullish impact on Gulf of Mexico gas production may be partially offset by demand destruction on the Atlantic coast if buildings, manufacturers and other gas consumers shut down."

If gas prices were to spike higher, exploration and production companies that are gas-weighted, minimally exposed to the Gulf and not significantly hedged "would likely outperform the rest of the group," including CNX Gas, Comstock Resources, EOG Resources and Ultra Petroleum. "Even companies with more hedges in place, such as Chesapeake Energy and XTO Energy, would still benefit from higher prices."

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