Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
FED Balance Sheet Current State - 5th Mar 21
The Global Vaccine Race Against Time and Variants - 5th Mar 21
US Treasury Yields Rally May Trigger A Crazy Ivan Event (Again) In Stock Market - 5th Mar 21
After Gold’s Slide, What Happens to Miners? - 5th Mar 21
Racism Pandemic Why UK Black and Asians NOT Getting Vaccinated - NHS Covid-19 BAME - 5th Mar 21
Get Ready for Inflation Mega-trend to Surge 2021 - 4th Mar 21
Stocks, Gold – Rebound or Dead Cat Bounce? - 4th Mar 21
The Top Technologies That Are Transforming the Casino Industry - 4th Mar 21
How to Get RICH Crypto Mining Bitcoin, Ethereum With NiceHash - 4th Mar 21
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Energy Corporate Earnings Season - Lowering the Bar

Companies / Oil Companies Apr 13, 2007 - 06:43 PM GMT

By: Elliot_H_Gue

Companies Corporate earnings reports for the first quarter are just starting to roll in; a slew of energy companies are scheduled to report earnings between now and the end of April. Earnings season is always an important time for stocks. Several times in the past two years comments from the bigger firms in the energy industry have revealed key emerging trends. 

But investors often interpret earnings reports and management commentary the wrong way. You can't analyze a company's results in a vacuum, nor can you simply compare results with analysts' expectations and decide whether a release is positive or negative for the stock. 

On countless occasions, I've seen companies show strong growth, handily beat estimates and make bullish comments on their conference calls, only to sell off in the wake of the release. The proper way to interpret earnings is to evaluate expectations and reactions. 

This quarter, I'm not expecting to see many big surprises from the industry. The basic outlook has already been well telegraphed during the past few months: There's a clear bifurcation in the industry between international activity and North American operations. 

North America has experienced a marked slowdown in drilling, exploration and development activity since the mid-2006. There are a few reasons for that. The most obvious is that a good deal of North American drilling activity is focused on natural gas rather than oil; the weakness in natural gas prices for much of last year makes gas production less profitable. 

The first areas to slow down were coal-bed methane and Canadian shallow gas drilling. These are some of the highest cost gas resources in North America. Now that weakness has spread to other drilling markets. 

Canadian drilling activity has slowed particularly quickly. Check out the Canadian rig count chart below for a closer look.

Source: Baker Hughes, Bloomberg

The rig count is nothing more than a measure of how many rigs are actively drilling for oil or gas in a particular region. The chart depicts not the actual rig count but the year-over-year change in the count. All the numbers are in percentage terms. 

Note for most of 2005 the Canadian rig count was sharply higher than in 2004. During the summer months in 2005, the rig count was, on average, more than 50 percent higher than during the same months of 2004. This was great news for oil and gas services companies and contract drillers with operations in Canada; all that activity spelled rising prices for services and rising day-rates for leasing drilling rigs. 

The picture began changing around the mid-2006. As you can see, the rig count began to shrink year-over-year alongside natural gas prices. The first weeks of 2007 were particularly brutal; the rig count has fallen sharply over the past year. 

As you might expect, this has had profound effects on companies with exposure to North America and, in particular, Canada. A host of companies have actually come out to warn their earnings wouldn't meet estimates, guiding analyst expectations sharply lower. One of the more recent manifestations of this was a warning from oil services giant Halliburton on March 20. 

Halliburton specifically cited weakness in North American activity as the driving force for its warning. I suspect that the company was particularly hard-hit by its exposure to North American pressure pumping. 

To explain this business in brief, oil and gas exist in the pores and crevices of reservoir rocks, not in giant underground caverns or lakes. When an operator spuds a well, the oil and/or gas--under tremendous geologic pressure--flows through the rock into the well and then to the surface.

But if the pores in a rock aren't well connected, there are few channels through which the hydrocarbons can travel. Although there may be plenty of gas in the ground, that gas is essentially locked in the pores of the rock and unrecoverable. 

But there are ways to produce such reservoirs. In the fracturing process, operators pump a gel-like liquid under tremendous pressure into the ground. That gel actually enters the reservoir and cracks the reservoir rock. By cracking or fracturing the reservoir rock, the operator creates channels through which gas can flow. These services are typically broadly dubbed pressure pumping. 

The problem with pressure pumping is twofold. First, North America remains the dominant market--though that's starting to change. Second, because of huge demand for pressure pumping, services firms have added to their capacity at a rapid pace by building and purchasing new pressure pumping trucks and equipment. 

This huge capacity growth was great when the market was going strong, but as demand slackened, a glut of pressure pumping capcity quickly developed. All this adds up to falling pricing power and lower profitability. 

On the flip side, drilling activity outside North America has never been more robust. International projects tend to be larger-scale, multiyear affairs; such projects are far less sensitive to short-term commodity price gyrations. 

And a good deal of international activity targets oil rather than natural gas. Oil prices are still off their 2006 highs but remain at high levels. In short, producers are making plenty of money on oil. Halliburton's international business continues to look strong. 

At any rate, Halliburton's warning wasn't good news. Looking at the numbers and guidance, you'd probably have expected the stock to get slaughtered. And the rig count picture for North America—where Halliburton still derives most of its revenues—doesn't exactly look bullish for the company. But that simplistic take would be largely incorrect. 

Halliburton's stock did fall on the day of the announcement. But look at what's happened over the past month: 


The lows on March 20 held, and the stock has actually been rallying since that time. By early April, Halliburton was actually trading above its pre-announcement levels. In fact, Halliburton set a new high for 2007 in April--hardly a drastically negative reaction to an ugly announcement and earnings warning.

Even more interesting was the action in BJ Services. I won't belabor the point by explaining all of BJ's operations; suffice it to say that the company is the most-heavily exposed to North American pressure pumping of any services firms I cover. 

You may have expected BJ's stock to get hit hard in the wake of Halliburton's announcement. Unlike Halliburton, BJ doesn't have a large international presence to bail the company out. 

But that didn't happen. Since Halliburton's March 20 warning, BJ Services is actually up just shy of 8.5 percent--a nice return in just the past few weeks. That's despite the fact that BJ Services' April 24 earnings release is almost certain to be replete with bad news about North America. In my view, the company may even miss its current consensus earnings estimates. 

The positive reaction to negative news flow in BJ Services and Halliburton stocks is a far more valuable bit of information than the news itself. This reaction tells us an important fact about the industry: These stocks are already pricing some bad news about North America. 

Although the underlying business in North America has deteriorated, the stocks are currently trading at a level that's attracting buyers on any dip. The bar of expectations has already been lowered enough for these stocks; they're now in an excellent position to rally through the upcoming earnings season. 

A year ago, the market seemed to be totally ignoring the possibility that there would be a slowdown in the North American drilling market. Although there were certainly some early signs of trouble brewing, analysts weren't really factoring those problems into their numbers and estimates. But the sharp decline in activity I outlined above is no secret now; the market knows and expects these companies to report some negative numbers. 

For the record, I'm currently recommending neither Halliburton nor BJ Services in The Energy Strategist ( That said, I tempered my long-held bearish outlook for both stocks back in February. I already recommend a few stocks levered to activity in the region; now I'm looking at more ways of playing washed-out North America-focused stocks. 

For those with a more-speculative bent, there should be some shorter-term trading opportunities in the next few weeks ahead of corporate earnings releases. I see very limited downside in North American services and drilling companies. 

Meanwhile, if any of these companies unveil a sliver of good news, the stock would shoot higher. The extraordinarily strong options buying activity in a slew of North American services names suggests that some bigger players are already jumping into the group.


By Elliott H. Gue
The Energy Letter

© 2007 Elliott H. Gue

Elliott H. Gue is editor of The Energy Letter , a bi-weekly e-letter as well as editor of The Energy Strategist , a premium bi-weekly newsletter on the energy markets. Mr. Gue is also associate editor for Personal Finance , where he contributes his knowledge of the energy markets.

Mr. Gue has a Master's of Finance degree from the University of London and a Bachelor of Science degree in Economics and Management from the University of London , graduating in the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that university.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules