Bringing oil and natural gas production back online in the Gulf of Mexico isn't turning out to be as easy as many had hoped.

That was the message from the U.S. Minerals Management Service Tuesday when it provided an update on production from the Gulf in the wake of hurricanes Katrina and Rita. Over 1 million barrels of daily oil production and over 6 billion cubic feet of natural gas remain offline in the Gulf, the federal agency said.

To date, 54.5 million barrels of oil production have been lost in the Gulf, nearly 10% of the region's annual output, and nearly 272 billion cubic feet of natural gas production, over 7% of yearly natural gas output. While that energy will eventually be extracted, it's still a significant amount of supply taken out of an already tight market.

As a result, oil prices remain well above $60 a barrel and natural gas prices are holding firmly above $10 per million Btu.

Infrastructure Mess

Bringing Gulf of Mexico production back to life is more than just turning on a spigot. At last week's Independent Petroleum Association of America investor conference in San Francisco, most Gulf exploration companies suggested they are beginning to return workers to production platforms, and they're finding the majority of platforms fared pretty well in the storms.

However, what didn't fare as well were wellheads, pipelines, gathering systems and coastal processing facilities. The infrastructure that helps bring oil and gas from the sea to shore is just as critical as the anchored hunk of steel from which energy is produced. Without pipelines and processing facilities, there is nowhere for oil and natural gas to flow. And, with flood and wind damage to such key areas as Venice, La., and the Sabine Pass area -- which straddles the Louisiana-Texas border -- it could be months before the Gulf infrastructure can handle pre-Katrina and Rita levels of oil and natural gas production.

"The Gulf Coast infrastructure is a mess," said Richard Bachman, chairman and CEO of New Orleans-based Energy Partners ( EPL), a Gulf of Mexico and Gulf Coast exploration and production concern. "Getting back to our platforms is one thing; accessing pipelines and processing plants is a much greater challenge."

Bachman said his company hopes to have about 80% of its production back online in the next few weeks, but it will take several more weeks to bring its prized East Bay field back to pre-storm levels due to damage to pipelines and processing facilities. "Anything underwater will have to have extensive electrical repairs," he said.

Other Gulf producers at the IPAA confab told the same story, with the same conclusion to draw: Production will come back only as fast as pipelines and processing facilities return to service. While most pipeline companies have been eerily quiet about the status of pipelines, major facilities are still offline with little guidance as to when they will return to full strength.

Don't Miss the Boats

The need to inspect and repair pipelines and other Gulf of Mexico infrastructure has resulted in big demand for work boats in the Gulf of Mexico. Companies like Hornbeck Offshore ( HOS) -- which my firm has provided investment banking services to in the past year -- and Tidewater Offshore ( TDW) are seeing strong demand for their vessels, with day rates continuing to climb. As a result of storm demand, boats that were working for as little as $10,000 to $12,000 per day last year are getting as much as $20,000 or more per day currently.

The boat market is so strong that Tidewater is bringing at least a dozen boats out of idle status and putting them to work in the Gulf. Assuming day rates in the $10,000 to $12,000 range, 20 boats could add an unexpected 50 cents to Tidewater earnings in the coming year.

In addition, inspection companies like Oceaneering International ( OII) and service companies like Superior Energy Services ( SPN) are also profiting from the need for repair and support services in the Gulf.

Volatility the Norm

The challenges to supply combined with strong demand for services suggest that the positive outlook for energy stocks should remain in place in the coming months. That said, recent action in energy equities has unsettled many investors who saw 10% to 20% of their energy holdings evaporate.

The shoulder season -- the period between high summer cooling demand and the beginning of winter heating season -- is a traditionally volatile period for energy stocks. And, with the meaningful acceleration in energy stock prices as a result of the storms and high commodity prices, it shouldn't be a surprise that they can move just as fast in the other direction.

A consistent theme in my advice about the sector -- and investing in general -- has been to stick to your discipline and understand your tolerance for risk and volatility. There is an opportunity ahead to re-enter the sector or build additional positions. That said, there is also likely some additional choppiness ahead. However, with earnings on the horizon and strong outlooks likely from industry leaders like National Oilwell Varco ( NOV) and Nabors ( NBR), third-quarter results and year-end outlooks should provide a jump start for many of the energy stocks.
Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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