Market Overview

Will Iran's Aggression Destroy the Oil & Gas Industry?

Whether people are scared about the possibility of World War III or rising gas prices, the Strait of Hormuz has been on everyone's mind for the last couple weeks. In investors' minds, the Strait of Hormuz represents a location that helps dictates crude oil and gasoline prices. Today, Iran further warned the US about its presence in the Strait.

Iran has repeatedly threatened to close down the Strait, which would severely undermine global oil trade, as a result of America's desire to oversee and control Iranian military functions. This morning, the Iranian military issued a statement warning the US to not let its Naval forces reenter the Strait of Hormuz. A spokesman for the Department of Defense stated that "US military assets in the Persian Gulf region will continue," a direct retaliation to the Iranians' threat.

Not considering the possibility that military conflict may occur, the friction based on the Strait of Hormuz will affect the energy sector in an increasingly volatile manner. If the conflict persists for weeks or even months, oil companies, no mater how diversified, will be affected adversely. To dive in a bit further, what sorts of companies will be directly affected by the Iranians?

Star Gas Partners

Star Gas Partners (NYSE: SGU) is an oil and propane service provider that primarily caters to residences and small commercial locations. It is like the average oil and provider in your hometown, but it is publicly traded and operates nationally.

Propane and oil are byproducts of crude oil refining and would be directly affected by crude oil prices. Should crude prices skyrocket, propane and oil will be much more expensive to refine and create. Higher prices will in turn decrease margins for Star Gas Partners. On a fundamental basis, the stock price would decrease since earnings and overall performance per share would decline as well.

Global Geophysical Services

Global Geophysical Services (NYSE: GGS) is a company that provides seismic data and solutions to companies in the oil and gas industry. If the Strait of Hormuz causes a spike in oil prices or even strains the supply of oil from the region, GGS may be a company of value. The seismically specialized firm may offer products that are extremely valuable to oil harvesters and refiners.

For example, Global Geophysical Services has the ability to find new oil wells or determine where the most lucrative mining facility is, making its services extremely valuable to oil companies. If Iran cuts off oil supply, GGS would be able to hike up its rates for its clients, thereby increasing revenues in the short to medium-term. In fact, this would be the case regardless of Iran's actions, as long as the price of crude continues to rise.

Chesapeake Utilities Corporation

Chesapeake Utilities Corp (NYSE: CPK) is a diversified utilities company with operations in Delaware, Maryland, and Florida. In Florida, Chesapeake operates various natural gas pipelines; in other locations, it distributes large amounts of propane. As can be inferred, natural gas as well as crude oil prices affect Chesapeake's performance.

Similar to other utilities companies that involve themselves in energy, Chesapeake could lose precious margins if oil prices spike. Especially considering that it has high exposure to natural gas and propane-based products, the firm may be especially at risk in the next few months.

Fuel Systems Solutions

Fuel Systems Solutions (NASDAQ: FSYS) designs and manufactures fuel systems. While it does not directly deal with crude oil, the company could still be affected by the Middle Eastern conflict. For example, its business could slow down if retail clients decide to decrease fuel systems usage as a result of crude oil prices. On the other hand, if the Middle Eastern conflict becomes increasingly complex, the US Federal Government may reach out to the company for advanced fuel-based solutions.

While there is no direct link, Fuel Systems Solutions' stock could be volatile in the face of Middle Eastern tensions. The stock may be skewed upward, however, as the company is attempting to find ways to optimize propane and natural gas usage. So, as the company's clients face diminishing margins, they may want to save money in the long-term by using more efficient technology.

Dynegy

Dynegy (NYSE: DYN) is a diversified electric energy provider. This company's margins will not directly fluctuate as a result of crude oil prices, but its expenses will most likely increase. Electricity consumes a lot of natural gas and oil in order to propagate itself to households and commercial buildings. Otherwise, generators are simply unable to run and provide their services.

Dynegy would not decline rapidly if crude oil prices, but the changes will be seen over the long-term. Costs will slowly eat away at the company and Dynegy will likely suffer due to rising crude oil prices. As one may expect, a large change in crude oil is necessary for it to suffer dramatically, but as some Merrill Lynch analysts expect, "crude oil could jump $40" if the Strait is shut down.

The Bottom Line:

The Strait of Hormuz is a key waterway that affects global energy trade. Crude oil, gasoline, and natural gas will all be affected adversely if the Iranian government shuts down the Strait, and investors everywhere are waiting for any talk regarding the Strait's future. The small-cap companies mentioned above tend to be more volatile than larger companies, and may be lucrative trades when traders have a clearer picture on the Middle East.

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