The outlook for U.S. energy companies looks brighter ahead of earnings
Two of the largest oil-field services companies beat Wall Street profit targets this week, renewing expectations of higher third-quarter earnings for energy companies amid stabilizing oil-futures prices.
Schlumberger Ltd. SLB, -1.69% reported late Thursday higher third-quarter profit that beat targets and sales only slightly below estimates. Schlumberger’s results came a day after rival Halliburton Co. HAL, -2.42% also posted higher-than-expected profit.
Halliburton’s CEO David Lesar warned about seasonal weakness in the fourth quarter, but sounded optimistic that the tide might be finally turning for oil prices after two years in the doldrums.
The precipitous fall for crude prices — from highs well above $100 a barrel in the summer of 2014 to sub-$50 just six months later — caused energy companies to cinch their belts, planning spending cuts, layoffs and asset sales to face the crisis.
Oil has stabilized to around $50 a barrel recently, helped by the Organization of the Petroleum Exporting Countries’ decision to consider a possible output cut when it next meets in November.
Broadly speaking, the outlook for energy companies has improved, said Brian Youngberg, an analyst with Edward Jones.
Spending is likely to increase slightly in the fourth quarter, and more meaningfully next year, he said. Companies are likely to shy away from specifics as they report third-quarter results, but might provide some color around their 2017 spending plans in the analyst calls.
As for crude prices, they could slide if OPEC backs off its agreement to freeze output, “but nothing like we saw a year ago” and likely holding around mid-$40s a barrel, Youngberg said. “We see oil gradually rising in 2017 with an average price near $53 for 2017.”
Small and medium exploration and production companies have snapped up assets and, in some cases, already increased capital spending plans this year (Apache Corp. APA, -0.34% which hiked its spending blueprint to develop an oil field in west Texas’ Permian region that it called “massive,” is the most notable example).
Earlier in the week, SM Energy Co. SM, -3.45% said it had agreed to buy 35,700 net acres in west Texas for $1.6 billion from QStar LLC and sell assets in North Dakota’s Williston Basin to Oasis Petroleum Inc. OAS, -3.17%
“We are modeling positive quarters on production beats for (Pioneer Natural Resources Co. PXD, -4.75% Noble Energy Inc. NBL, -2.20% Cimarex Energy Co. XEC, -2.79% Parsley Energy Inc. PE, -3.38% Laredo Petroleum Inc.LPI, -1.98% and SM Energy,” the Tudor analysts said. “Longer-term top picks remain (Concho Resources Inc. CXO, -3.86% Cimarex and Pioneer), given asset quality, balance sheet strength, and line of sight to inventory expansion and incremental resource delineation in the near term.”
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Third-quarter production likely will be down from second quarter and from the year-ago period, Youngberg said. “Focus will be more on cash flow, capital spending into 2017, execution of any recent acquisitions, further new well results, ongoing efficiencies, potential cost inflation as things improve, and hedging,” he said. West Texas’ Permian and the Anadarko basin in Oklahoma will continue to be the focus of more commentary, with Texas’ Eagle Ford less so, he said.
For the giant integrated companies, investor focus will be on cash flow, any comments on future spending, and on the continued weakness in refining, he said. Chevron should increase the dividend modestly, Youngberg said.
Chevron and Exxon are both scheduled to report before the bell Oct. 28. Chevron is expected to report adjusted earnings of 39 cents a share, compared with $1.25 a share in the year-ago period, according to analysts polled by FactSet. Exxon is expected to report adjusted profit of 59 cents a share, from $1.01 a share a year ago.
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