Energy earnings euphoria
By JIM KENNETT
Copyright 2000 Houston Chronicle
Surging commodities prices and fast-growing power markets promise big gains in most energy companies' first-quarter earnings, compared with the quarter last year.
But profit figures are likely to show that the wealth has failed to trickle down to the deepwater drilling and services companies.
North American natural gas and crude oil prices have driven the market for independent oil producers, creating windfall revenues at a time when many companies are lean and mean from two years of depression.
"Where's the rocket science?" said David Garcia, a research analyst at First Union Securities. "Oil's up 30 percent, natural gas is up 30 to 50 percent. ... The E&Ps are in a spectacularly good environment."
From early January until this week, crude oil has hovered between $25 and $30 a barrel, up from a low of $10.72 in December 1998. May crude oil closed Tuesday at $24.14 on the New York Mercantile Exchange.
Natural gas has performed similarly well, up to $2.95 per thousand cubic feet from a low of $1.63 in 1998.
While analysts predict a banner quarter for earnings, the improvement is likely to be particularly dramatic compared to the first quarter of 1999 -- before oil production cuts by the Organization of the Petroleum Exporting Countries began lifting prices.
The average estimate reported by First Call/Thomson Financial indicates that most of the large, local independents, who were losing money a year ago, will be solidly profitable this time around. Apache is expected to soar to 91 cents per share, up 87 cents from the first quarter of 1999.
But the jump in earnings at exploration and production companies appears not to have been passed on yet to the service companies, which sell everything from drill bits to deepwater rigs to loading terminals.
The problem, analysts said, is that the oil majors that buy the services are focusing more on share-buybacks, paying down debt, streamlining operations and investing in technology rather than developing international oil and gas fields.
"When you're done with all that, you don't have any money left over," said Byron Dunn, executive director at Warburg Dillon Read.
Most large drillers, such as Global Marine and R&B Falcon Corp., are expected to come up short of last year's earnings for the quarter. Likewise for the local field services giant Baker Hughes.
Analysts polled by First Call/Thomson Financial expect Baker Hughes to produce no earnings per share for the first quarter. The deepwater driller Global Marine is expected to earn 6 cents a share, down 15 cents from last year; and R&B Falcon is expected to lose 22 cents per share, compared with earnings of 2 cents per share in the 1999 quarter.
The exception to the rule appears to be oil-service firms that sell to North American gas fields.
Independent producers working U.S. and Canadian fields must ramp up production quickly to take advantage of prices. The result has been higher earnings for services firms catering to the North American onshore and shallow-water markets.
One such company, BJ Services, is expected to post first-quarter earnings of 30 cents per share. Other drillers working in shallow Gulf Coast waters, such as Nabors, also should come out strong in the first quarter.
Nabors is expected to earn 11 cents per share this year, only slightly lower than the 12 cents in the first quarter of last year. However, many investors are watching the company's improvement from the fourth quarter of 1999, when it delivered earnings of just 6 cents per share, said Andreas Vitor, oil-field services analyst at Hanifen Imhoff in Denver.
"A lot of people are focused on sequential improvements, not necessarily year over year," Vitor said. "They're focused on the trend."
Analysts pitching deepwater drillers and large services firms are looking for a turnaround in 2001, when oil companies should start commercial development of expensive deepwater fields in the Gulf of Mexico and in waters off Brazil, Southeast Asia and West Africa.
"Given the magnitude of the excess cash flows that are currently being generated (by exploration and production companies) ... we think that is not only going to fuel a very healthy increase in spending in the second half of 2000, but also 2001," said William A. Herbert, co-head of oil service research at Simmons & Co. "Most investors are really looking to 2001 as a primary benchmark indicator for these stocks."
Hybrid energy companies, which include Enron, Dynegy and El Paso Energy, are expected to have strong first-quarter showings, with earnings coming in above analysts' predictions.
Hybrids are pipeline firms that have moved into power generation, electricity transmission and commodities sales.
Power generation and transmission are driving all of these firms, with those operating in deregulated markets at the top of the list.
Regulated markets allow a fixed return of between 12 and 14 percent before taxes, while deregulated markets' returns range from 15 to 30 percent, according to Carol Coale, a senior natural gas analyst with Prudential Securities in Houston.
Dynegy has only 20 percent of its gas and power markets in regulated markets, and Enron only 28 percent, Coale said. El Paso has 57 percent and Kinder Morgan 77 percent.
Despite its favor with shareholders, the expectation is that Enron generated earnings of only 3 cents a share in the first quarter. The company is scheduled to announce its results today.
"They've been criticized for (their low earnings), but they've been delivering their capital in areas where they expect future returns rather than current returns," Coale said. "It's worked. The stock has been incredible." |
