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Energy Earnings Calls: Insights And Outlook
A review of 250+ energy company Q2 earnings calls
Last week marked the end of the 2016 2nd quarter earnings season which kicked off July 20th and ended August 11th. Our chart below highlights performance across the energy value chain during the second quarter reporting season. While commodity prices declined during the period, returns across the energy sector ranged from a positive 5.6% as reflected by the Refiners Index to a -3.6% as reflected by the S&P Oil and Gas Equipment Select Industry Index®.
The gold medal given for best performance during the earnings season across the various Tortoise indices was awarded to the Tortoise North American Oil and Gas Producers IndexSM which rose by 2.3% despite declines in both crude oil and natural gas prices. In general, small-cap, high-yielding MLPs were the best performing stocks across the energy universe during this period.
Other Call-Outs from Earnings Calls
Our Tortoise portfolio management team listened to more than 250 conference calls across the energy universe including approximately 90 oil and gas producers, 110 energy infrastructure or midstream companies and 50 downstream companies.
The individual winner in the all-around competition was MLP Global Partners that announced asset sales to bolster its balance sheet, increasing the likelihood of a sustainable distribution. The stock price of Global Partners rose by 25% during the earnings season.
On the flip side, the “Mr. Irrelevant” award for the energy stock that was at the bottom of the list with regards to performance goes to Rowan Companies, an offshore contract drilling oil field services company that declined 19%, given the continued challenges faced by many offshore drillers in the second half of 2016 and beyond.
Oil and gas producer sector: U.S. producers consistently raised 2016 production forecasts by 2% on average without increasing capital expenditures. Investors generally reward this combination.
The Permian Basin producers led the way with the greatest production beats and many announced rig additions that should positively impact 2017 production. Improved well productivity and efficiency gains are pushing the Permian to a new level. Permian producers are talking like tech companies referring to version 3.0 when referencing the company’s latest well design. Version 4.0 and higher are likely to be announced in the future, which should make the Permian even better. Most Permian producers are already earning healthy returns on investments even with oil prices hovering around $45 per barrel. This is why the Permian has established itself as the dominant U.S. oil basin and three of the top five performing oil and gas producers during the earnings season had significant acreage in the Permian Basin.
Oil field services sector: A showdown between producers and oil field service operators is about to begin as OFS operators want to improve margins through price hikes now that the rig count has bottomed.
Midstream: The energy infrastructure or midstream sector entered the earnings season with some unanswered questions but exited the earnings seasons with answers. The biggest question centered on the dividend levels paid by Plains All American Pipeline, L.P. and Williams Companies, Inc., the two largest energy infrastructure companies. We addressed the largest dividend cuts of the quarter at PAA and WMB on previous podcasts. Last week, additional clarity was provided by Williams in relation to one of its largest customers Chesapeake Energy. Williams and Chesapeake entered into a win-win transaction with Williams receiving an upfront cash payment relieving Chesapeake’s volume commitment which allows Chesapeake to remove a future liability in the only settlement of its kind last week.
A second question surrounding energy infrastructure companies, included MLPs focused on dividend and distribution growth. Energy infrastructure companies resoundingly answered this question using growing cash flow streams to increase distributions. For the second quarter, the mean distribution increase over the previous quarter excluding the Plains and Williams cuts, was 2.9%. With the Tortoise MLP Index currently yielding 7.2% and the second quarter earnings season providing answers to many questions, in our view, the midstream sector is well positioned to satisfy investors search for current income in this low interest rate environment.
Downstream: This sector delivered a variety of returns across the various subsectors. Refiners returns were approximately 6% during the earnings season based on the market-cap weighted performance of the nine U.S. refiners. Refiners benefited from record utilization rates, significant export volumes and better than expected refining margins. Utilities represented by the Utilities Select Sector Index traded off by almost 2% during the earnings season.
With the second quarter 2016 earnings season in the books, we’re gearing up for the next season, encouraged that the fundamentals in various commodities continue to show signs of improvement.
Tortoise North American Oil & Gas Producers IndexSM
The Tortoise North American Oil & Gas Producers IndexSM is a float-adjusted, capitalization weighted index of North American energy companies primarily engaged in the production of crude oil, condensate, natural gas or natural gas liquids (NGLs). The index includes exploration and production companies structured as corporations, limited liability companies and master limited partnerships but excludes United States royalty trusts.
S&P Oil and Gas Equipment Select Industry Index
S&P Oil & Gas Equipment Select Industry index is an equal weighed market cap index for U.S. common stocks in the oil and gas equipment sub-industry of the S&P Total Market Index.
Tortoise MLP Index® The Tortoise MLP Index® is a float-adjusted, capitalization weighted index of energy master limited partnerships (MLPs). The index is comprised of publicly traded companies organized in the form of limited partnerships or limited liability companies engaged in transportation, production, processing and/or storage of energy commodities.
The indices are the exclusive property of Tortoise Index Solutions, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) (“S&P Dow Jones Indices”) to calculate and maintain the Tortoise MLP Index®, Tortoise North American Pipeline IndexSM and Tortoise North American Oil and Gas Producers IndexSM (each an “Index”). S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and, these trademarks have been licensed to S&P Dow Jones Indices. “Calculated by S&P Dow Jones Indices” and its related stylized mark(s) have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. Neither S&P Dow Jones Indices, SPFS, Dow Jones nor any of their affiliates sponsor and promote the Index and none shall be liable for any errors or omissions in calculating the Index.
Tortoise North American Pipeline IndexSM
The Tortoise North American Pipeline IndexSM is a float-adjusted, capitalization weighted index of pipeline companies headquartered in the United States and Canada. A pipeline company is defined as a company that either 1) has been assigned a standard industrial classification (“SIC”) system code that indicates the company operates in the energy pipeline industry or 2) has at least 50% of its assets, cash flow or revenue associated with the operation or ownership of energy pipelines. Pipeline companies engage in the business of transporting natural gas, crude oil and refined products, storing, gathering and processing such as gas, crude oil and products and local gas distribution. The index includes pipeline companies structured as corporations, limited liability companies and master limited partnerships (MLPs).
Utilities Select Sector Index
The Utilities Select Sector Index is a modified capitalization-weighted index. The index is intended to track the movements of companies that are components of the S&P 500 and are utilities.
Refiners is a capitalization-weight return based on nine U.S. refiners including: Tesoro Corporation, Valero Energy, Phillips 66, Marathon Petroleum, Western Refining, Delek, PBF Energy, CVR Refining, and Alon USA Energy/
S&P 500 Chemicals Industry Index
The S&P 500 Chemical Industry Index is a custom, equal weighted index comprised of the major chemical companies listed in the United States.
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