Lower profits for energy companies dampen hopes for sector recovery

Published: Feb 10, 2017 7:04 a.m. ET

A poor showing in quarterly results has disappointed those hoping that this year would bring a proper rebound

Getty

 

Energy companies have reported a mixed bag of quarterly earnings, casting a shadow on a year that started with high hopes for the sector.

About half of the energy companies in the S&P 500, or 19 companies, have reported fourth-quarter earnings.

Of those, 12 companies, or slightly more than 60%, beat analyst expectations, and six, or slightly more than 30%, did not, according to FactSet. One company, Kinder Morgan Inc. KMI, +0.98% reported results that were in line with expectations.

Bellwethers such as Exxon Mobil Corp. XOM, +0.98%  and Chevron Corp. CVX, +0.74%  missed expectations by a wide margin. Outside the S&P universe, overseas giants such as Royal Dutch Shell RDS.A, +0.95%  and BP Plc. BP, +0.35%  also reported worse-than-expected results.

“It’s not like you had a lot of earnings misses (for energy companies), the numbers were more of a mixed bag,” said Stewart Glickman, an analyst with CFRA. “But there was at least a little bit more stirrings of enthusiasm for North America” going in to the quarter, he said.

Overall, nearly 70% of the companies on the S&P 500 have reported, and of those nearly 70% reported earnings beats and 23% reported misses, with the remaining companies reporting earnings that were in line with expectations.

Energy stocks have outperformed the S&P 500 index SPX, +0.19%  in the past 12 months.

In all of fourth quarter 2015, energy companies were split, with 26 reporting positive surprises and 25 negative, according to FactSet.

Hopes had been higher for the current reporting quarter, however, as oil futures prices ended 2016 stronger. Last year, the Organization of the Petroleum Exporting Countries announced a pact to curb production alongside non-OPEC members in the first half of the year.

Concerns that sizable increases in U.S. output and inventories would disrupt that rebalance, however, have taken down oil prices in recent weeks.

Saudi oil minister sees rising costs for U.S. shale

Speaking at the World Economic Forum in Davos, Switzerland on Tuesday, Khalid al-Falih, Saudi Arabia’s oil minister, said U.S. oil shale producers “will find they need higher prices” because the most prolific reservoirs are being exhausted and squeezed contractors are increasing the amount they charge. Photo: Reuters.

Supply “is playing a much larger role than before and that may keep prices pinned lower than we’ve seen in the recent past,” said Brian Singer, a partner at William Blair, in a recent blog post on the company’s website.

The U.S., rather than OPEC members, is the swing producer, and it can bring shale oil to market much faster than traditional wells, he said.

“The high inventories in the United States are therefore keeping a lid on prices, while OPEC and the recent OPEC production cut are putting a floor on prices. Current inventories are still high, but we think they will dissipate over time as OPEC production is reduced,” he said.

Compliance with the production curb is another unknown. And besides rising U.S. output, production in Iran, Libya, and Nigeria are expected to rise “and (are) stealing the thunder from OPEC cuts,” said CFRA’s Glickman. It would take a significant geopolitical event to change that picture and push oil futures to around $60 a barrel, he said.

For investors, it becomes a stock-picking game, Glickman said. “I would rather be in names that don’t depend on $60 oil to make money,” he said.

Top picks for CFRA include Diamondback Energy Inc. FANG, +1.70% EOG Resources Inc. EOG, +2.03% Marathon Oil Corp. MRO, +1.50% and Noble Energy Inc. NBL, +1.20%

Diamondback and Marathon are large players in the prolific west Texas Permian Basin, whereas Noble is a major player in natural-gas fields offshore Israel, he said.

EOG seems to be preparing for a “long term scenario where prices don’t go back to their heyday,” Glickman said.

Analysts at Morgan Stanley also highlighted EOG and Diamondback as among the investment bank’s “best ideas,” as well as Newfield Exploration Co. NFX, +2.25%  and Parsley Energy Inc. PE, +2.40%

 

 

http://www.marketwatch.com/story/lower-profits-for-energy-companies-dampen-hopes-for-sector-recovery-2017-02-09