It was a week where both oil and natural gas prices settled sharply lower.
On the news front, oilfield service majors Schlumberger SLB and Halliburton HAL reported second-quarter earnings. While the North America business environment remains challenging, both companies expect further uptick in international drilling activity, confirming the region’s broad-based recovery.
Overall, it was a dismal week for the sector. West Texas Intermediate (WTI) crude futures slumped 7.6% to close at $55.63 per barrel, while natural gas prices dropped 8.2% for the week to finish at $2.251 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Callon Petroleum's Acquisition, McDermott's Contract Wins & More)
The U.S. crude benchmark logged its lowest settlement level since Jun 19, after the U.S. government reported a smaller-than-expected decline in oil stockpiles and swelling fuel inventories – all troubling signs of oil demand. Prices also remained under pressure from the return of some oil production in the Gulf of Mexico, as companies began to recover from Hurricane Barry.
Natural gas prices plunged too, pressured by healthy supply and a bearish near-term weather forecast that signals weak power sector demand for the fuel.
Recap of the Week’s Most Important Stories
1. Schlumberger reported second-quarter 2019 earnings of 35 cents per share (excluding charges and credits), in line with the Zacks Consensus Estimate. The bottom line, however, declined from 43 cents a year ago.
Contributions from drilling operations in the international markets aided the quarterly results. Higher wireline and testing services in Russia and Central Asia as well as the United Kingdom and Continental Europe were also the positive factors. These were partially offset by soft prices of hydraulic fracturing.
With the increase in count for drilling rigs in international resources, Schlumberger reaffirmed its projection at 7% to 8% higher international spending by upstream energy firms. However, explorers are facing constant investor pressure for higher returns instead of production growth. The headwinds are likely to lower investments by explorers and producers in the land market of North America by 10% through 2019, reaffirmed the world’s largest oilfield service firm. (Read more Schlumberger Q2 Earnings Meet Estimates, Revenues Top)
2. Smaller rival Halliburton reported higher-than-expected second quarter profit on robust international activity. The company saw its adjusted net income (excluding impairments and other charges) come in at 35 cents per share, outperforming the Zacks Consensus Estimate of 30 cents. However, the bottom line was below the adjusted earnings of 58 cents in the year-earlier quarter on weakness in the North American market.
The world’s biggest provider of hydraulic fracking noted that United States land activity levels in the second quarter improved sequentially, particularly in the pressure pumping business, while drilling and artificial lift activity picked up too. Halliburton did encounter lower pressure pumping activity in Canada and a fall in drilling fluid activity in the Gulf of Mexico but the company continues to successfully ride the changing market dynamics through excellent execution and management of the controllable factors.
Meanwhile, Halliburton is witnessing broad-based, steady recovery in its international business. The company anticipates its international revenue to grow at a high single-digit rate in 2019, with further improvement next year. Importantly, Halliburton believes it has got the scale and required technology portfolio to take advantage of this growth trend. (Read more International Growth Drives Halliburton Q2 Earnings)
3. Kinder Morgan Inc. KMI posted second-quarter 2019 adjusted earnings of 22 cents per share, missing the Zacks Consensus Estimate by a penny. However, the bottom line improved from the year-ago quarter’s 21 cents.
The lower-than-expected results were owing to reduced contribution from the KM Crude & Condensate Pipeline and lower terminal volumes. This was offset partially by higher earnings from the Zacks Rank #3 (Hold) midstream energy player’s natural gas pipelines.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company’s second-quarter distributable cash flow increased to $1,128 million from $1,117 million a year ago. The company had a project backlog of $5.7 billion for the June quarter. Kinder Morgan reaffirms 2019 dividend at $1.00 per common share. Moreover, the company maintains adjusted EBITDA and DCF for 2019 at $7.8 billion and $5 billion, respectively. However, Kinder Morgan added that its adjusted EBITDA for 2019 could be marginally below budget. (Read more Kinder Morgan Misses Q2 Earnings & Revenue Estimates)
4. Range Resources RRC recently announced its decision to divest 2% overriding royalty interests in Appalachia assets. The company will likely receive a gross amount of $600 million for the resources, spread across 350,000 net acres in the southwest of the basin.
Range Resources expects the deal, which involves two separate transactions, to close by the end of July. The last time the company had announced a royalty sale in the Appalachian was in October 2018, when the upstream energy firm sold a 1% overriding royalty interest in the basin for $300 million of gross proceeds.
The latest properties that the company has agreed to sell have produced a total of 1.9 billion cubic feet equivalent per day through the March quarter of 2019. Moreover, the company announced that it will get a total of $34 million from the closure of the divesture of several non-producing properties in Pennsylvania. (Read more Range Resources Decides $634M Asset Divestment in Appalachian)
5. SM Energy Company SM) recently announced second-quarter 2019 total production of 136.5 thousand barrels of oil equivalent per day (MBoe/d), higher than the year-ago period’s 115.2 MBoe/d, backed by better-than-expected performance from the Permian Basin and South Texas region. Moreover, production increased 16% sequentially. Of the total production in the June quarter, 44% is expected to be oil.
The better-than-expected performance so far has enabled the company to boost its full-year 2019 production guidance to the range of 129-131 MBoe/d, the midpoint of which is higher than the previous guidance of 124.4-132.6 MBoe/d. The revised guidance is much higher than the 2018 figure of 120.3 MBoe/d.
In the second quarter, the company incurred a cost of $269 million related to oil and gas activities. Total capital expenditure for the quarter is estimated at $261 million, below the earlier guided level and first quarter’s realized amount of $316 million. For full-year 2019, it reduced its total capital spend guidance at the midpoint to $1,025 million. (Read more SM Energy's Q2 Production Rises, Capital Spending Falls)
The following table shows the price movement of some the major oil and gas players over the past week and during the last six months.
Last 6 Months
Reflecting the negative market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – was down 2.6% last week. The worst performer was offshore driller Transocean Ltd. RIG whose stock slumped 10.2%.
But longer-term, over six months, the sector tracker is up 2%. Integrated energy major Chevron CVX was the major gainer during this period, experiencing a 12.5% price increase.
What’s Next in the Energy World?
As usual, market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count and the 2019 Q2 earnings, with a number of S&P 500 members coming out with quarterly results.
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