bidnessetcnews:
Bidness Etc takes a look at how efficiency gains along with sequential improvement in crude oil prices will influence the E&P industry’s financial performance going into 2QFY15 results
In fiscal year 2015’s second quarter, (2QFY15, ended June 30, 2015),
West Texas Intermediate (WTI) crude witnessed a sequential price rise of
19% in contrast to a 3% slip in Henry Hub natural gas. The financial
results of the exploration and production (E&P) industry could be
stabilized by a wave of spending cuts and drilling efficiencies.
The
industry faces a slew of serious challenges that need to be solved
before it can progress. Among them are subdued global economic growth
forecasts, crude oil inventory excess in the US, resilient US
production, alongside excess production from the Organization of
Petroleum Exporting Countries (OPEC).
We have picked seven
large-cap E&P companies and closely studied different aspects of
2QFY15 results. The seven are ConocoPhillips (COP), Anadarko Petroleum Corporation (APC), Occidental Petroleum Corporation (OXY), Hess Corporation (HES), EOG Resources Inc. (EOG), Apache Corporation (APA), and Chesapeake Energy Corporation (CHK).
Revenue And EPS Outlook
WTI
prices can be expected to remain within a tight and volatile range as
any increase in price will be countered by higher production from unused
wells. The following table shows how the past year’s weakness in crude
oil and natural gas prices could influence projected revenue and
earnings per share (EPS), based on the Street’s forecasts compared to
last year.
During
the second quarter of this financial year, Chesapeake Energy is
expected to suffer the biggest decline in revenues, 46.60%
year-over-year (YoY) to $2.75 billion. This collapse stems from
depressed commodity prices plus asset disposals in the past twelve
months. By contrast, all seven companies were profitable during the
second quarter of last year. Now, only three are expected to report
positive adjusted EPS during 2QFY15.
Capital Expenditure Outlook
The
scale back in drilling plans and perpetually depressed commodity prices
could disturb capital expenditure outlay by E&P companies during
2QFY15. Sector businesses in North America can be expected to cut
spending by 20% to 30% on the basis of current pricing. The table below
shows the capital expenditure outlook of some of the leading E&P
corporations.
Apache
Corporation. is expected to undergo the greatest compression in capital
expenditure of 69% YoY to $886.50 million. Amongst our chosen seven
large-cap businesses, Hess Corp. is expected to increase its capital
expenditure by 23% YoY to $1.11 billion, despite the distressed
commodity price environment.
Short Interest Outlook
With
the approach of the 2QFY15 results season, short interest in E&P
organizations has increased. As can be seen in the table below:
Among
the seven large-cap entities we selected, Chesapeake Energy has the
highest short interest ratio of 8.70 days. 31.76% of the total float
from the Oklahoma City-based business has been sold short by investors
across the Street.
E&P Companies Underperforming Commodity Price Declines
Concerns
surrounding increased global demand and supply imbalances has disturbed
the performance of this group of E&P sector companies against
underlying commodity prices and the S&P 500 Index.
Lower
prices during the first quarter drove demand forward stimulating
optimism for the E&P sector. That was cut short by a nexus of
resilient US output, consistent Saudi production, sluggish global demand
growth plus the prospective return of Iranian supplies. All have
combined to suppress WTI crude prices.
The performance of the
S&P 500 Index, WTI crude oil and Henry Hub natural gas prices for
three different periods since the start of the year is shown below:
Meanwhile, the seven large-cap companies’ performance during the corresponding period is shown below:
Chesapeake Energy has endured the furthest stock price drop in the past month, three months and year-to-date (YTD).
Conclusion
As
the 2QFY15 results season progresses, investors appear to have bearish
instincts toward the oil and gas E&P industry. The three-month price
recovery may provide no respite to these companies in their quarterly
results. Significant portions of oil and gas production are already
hedged in previous periods at earlier prices, binding everyone to their
current course.