It was a week where oil prices settled at their lowest level since May 9, while natural gas futures edged higher.
On the news front, oilfield service majors Schlumberger Ltd. SLB and Halliburton Co. HAL kicked off the energy earnings season with better-than-expected numbers. Importantly, both the companies hinted that the worst is over for oil and the sector is set to rebound.
Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures fell 3.8% to close at $44.19 per barrel, natural gas prices edged up 0.8% to $2.777 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Exxon Bids for InterOil, BP's Oil Spill Cost Hits $62B.)
Oil prices booked a weekly loss after the U.S. Energy Department's latest inventory release showed a surprise build in gasoline supplies despite rising summer demand. A slowdown in domestic output decline and prospects of return of some of Libya’s disrupted oil production, also played spoilsport. Things further worsened with the Baker Hughes report revealing another rise in the U.S. oil rig count – indicating resurgence in shale drilling activities.
However, natural gas moved north following a less-than-expected build. The upward movement could also be attributed to predictions of strong cooling demand with forecasts of hot weather across the country over the next few days.
Recap of the Week’s Most Important Stories
1. The world’s largest oilfield services provider Schlumberger Ltd. reported slightly better-than-expected second-quarter 2016 results. The challenging market conditions notwithstanding – both in terms of pricing and activity – the company managed to beat the Zacks Consensus Estimate by the narrowest of margins, driven by a full quarter of activity from the Cameron acquisition.
However, the performance was way off the year-ago quarter numbers as all groups – Reservoir Characterization, Drilling and Group – registered year-over-year fall in sales and income.
On a positive note though, Schlumberger believes that oil sector’s worst is over and it is on a path to recovery. The commodity price rebound will not only help the company post sequential growth but also give it the flexibility to withdraw some of the price concessions (Read more: Schlumberger Q2 Earnings Fall Y/Y on weak Activity).
2. Smaller rival Halliburton Co. also reported better-than-expected second-quarter 2016 results following higher fluid works and improved pipeline services in the North Sea. However, lower pricing and reduced global activities – especially North American pressure pumping works – hurt results significantly over the year-ago quarter.
While the bar was set low this time around – thanks to the commodity downturn – the oilfield service behemoth swung to a loss from a profit last year. Worse, the failure of the Baker Hughes acquisition meant that Halliburton had to book a massive $3.5 billion in breakup charge.
However, Halliburton remained upbeat on the North American operating environment, expecting rig count to increase modestly during the second half of 2016 which should push up activities in the region (Read more: Halliburton Slips to Loss in Q2, Beats on Revenues).
3. Kinder Morgan Inc. KMI – one of the largest midstream companies in North America – reported second-quarter 2016 earnings of 15 cents a share from continuing operations, in line with both the Zacks Consensus Estimate and the year-ago quarter. Kinder Morgan’s cost savings improvement was offset by the effects of lower commodity prices.
Total expenses in the quarter were $2,204.0 million, down 14.3% from $2,571.0 million spent in the second quarter of 2015. Operating income came in at $940.0 million, up 5.4% from the prior-year comparable quarter. Second-quarter net income was $333.0 million, flat year over year.
Kinder Morgan expects to pay dividends of 50 cents per share in 2016. Due to the prolonged weakness in commodity prices, the company expects EBITDA and distributable cash flow to be below the budgeted amount by 3% and 4%, respectively (Read more: Kinder Morgan Earnings In Line in Q2, Revenues Miss).
4. Calgary, Alberta-based Encana Corp. ECA reported operating earnings per share of 10 cents, contrary to the Zacks Consensus Estimate for a loss of 8 cents. In the year-ago quarter, the company incurred operating loss of 20 cents per share. The outperformance came on the back of successful cost containment efforts.
Encana reported operating costs of $135 million for the reported quarter, 32% lower than the year-ago quarter level. Meanwhile, transportation and processing expenses fell 18% to $244 million.
Encana had earlier set $900 million-$1 billion as 2016 capital expenditure budget. However, the company plans to utilize a part of its divestment proceeds – from the sale of its Gordondale and DJ Basin properties – to increase this year’s capital expenditure budget by another $200 million.
Finally, encouraged by the success of its cost-cutting plans, Encana expects to lower its transportation, processing and operating expenses by $1000 million in 2016 (Read more: Encana Q2 Earnings Crush Estimates on Cost Control).
5. Independent natural gas operator Southwestern Energy Co. SWN reported narrower-than-expected second quarter loss as lower costs and increased margins more than offset production decline and lower price realizations.
During the reported quarter, the company’s E&P costs declined 6% year over year to $1.17 per Mcfe, while lease operating costs were within the guided range. However, oil and gas production declined 8.2%. Average realized gas price for the quarter, including hedges, fell to $1.32 per thousand cubic feet (Mcf) from $2.23 per Mcf in the year-ago period. Oil was sold at $33.50 per barrel, significantly down from the year-earlier level of $97.71 per barrel. Oil was sold at $32.46 per barrel, significantly below the year-earlier level of $40.88.
With gas prices up significantly since March, Southwestern doubled capital expenditure from $350-$400 million previously to $725-$775 million and plans to bring back 5 rigs by the end of third quarter (Read more: Southwestern Energy Incurs Loss in Q2, Guides Up).
Price Performance
The following table shows the price movement of the major oil and gas players over the past week and during the last 6 months.
|
Company |
Last Week |
Last 6 Months |
|
XOM |
-1.05% |
+27.07% |
|
CVX |
-1.81% |
+30.62% |
|
COP |
-4.77% |
+19.18% |
|
OXY |
-2.16% |
+21.99% |
|
SLB |
+4.45% |
+28.93% |
|
RIG |
-8.37% |
+22.50% |
|
VLO |
-0.46% |
-23.43% |
|
TSO |
+0.85% |
-11.55% |
Over the course of last week, ‘The Energy Select Sector SPDR’ was down 2.18% on renewed concerns over a global supply glut. Consequently, investors witnessed selling in most market heavyweights. The worst performer was offshore drilling giant Transocean Ltd. RIG whose stock price fell 8.37%.
But longer-term, over the last 6 months, the sector tracker has jumped 22.09%. U.S. energy behemoth Chevron Corp. CVX was the main beneficiary during this period, experiencing a 30.62% price increase.
What’s Next in the Energy World?
As usual, market participants will be closely tracking the regular weekly releases i.e. the U.S. government data on oil and natural gas. Energy traders will also be focusing on the Baker Hughes data on rig count. However, the 2016 Q2 earnings remain the primary focus this week, with a number of S&P 500 members coming out with quarterly results.
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