Earnings season for any sector can be unpredictable, but particularly for Energy, which is impacted by geopolitical events, as well as company specific fundamentals. Investors should use the news flow during earnings season to update their investment thesis on various stocks they own, and to ensure that the original reason they bought the stock is still in place. A sell discipline is one of the most important facets of the investment process, and is neglected too much by both professional and individual investors.
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Downstream
It's no secret that refining is weak, as both Conoco Phillips (NYSE:COP) and Chevron (NYSE:CVX), reported in its interim updates last week. We should see more confirming evidence of this when other large integrated oil companies report. This includes Exxon Mobil (NYSE:XOM), which will hold its second quarter earnings conference call on July 30, 2009.
The company earned $1.13 billion in the downstream in the first quarter of 2009, so look for that to be considerably lower if results follow the same trend as its two smaller competitors. The good news for Exxon shareholders is that its upstream earnings dwarf the downstream so earnings should be protected to some extent. Upstream earnings were $3.5 billion for Exxon Mobil in the first quarter of 2009.
Upstream
North American Shale Plays have been garnering a lot more publicity over the last few months, as the significant potential of these areas hit the mainstream media. Investors should look for the many independent exploration and production companies who are active here to use earnings calls to announced well results.
Petrohawk Energy (NYSE:HK) has properties in many different shale areas, but has taken the lead in promoting its acreage in the Eagle Ford Shale in South Texas. Petrohawk has several wells in various states of progress, but has not released production data yet on two wells that were recently completed. These wells are the Dora Martin 1716 1H and the STS Palmert 944-1H, both in LaSalle County. If these wells are really successful, look for Petrohawk to release data on them even before its earnings release, in an interim operations update.
The Haynesville Shale is also a hot spot for development activity, and Goodrich Petroleum (NYSE:GDP) has 66,500 net acres under lease that are prospective for the Haynesville Shale. The company plans 33 gross wells in 2009, and will no doubt have something to report when it releases earnings. Goodrich Petroleum reports after the close of the market on August 6.
Finally, look for exploration and production companies to be interrogated by the analyst community on the growing resistance by communities to Hydraulic Fracturing, which is a critical technology used in horizontal drilling to allow these shale plays to produce economically. Some have expressed concern that the process may affect groundwater supplies. Chesapeake Energy (NYSE:CHK) has taken the lead in defending this technology with an extensive section of its web site devoted to assuaging some of the environmental concerns about drilling.
Investors should use earnings season to refine their investment thesis, as nothing stands still in the investing world, particularly in a sector as dynamic as Energy. (To learn more, see Oil And Gas Industry Primer.)
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