The energy sector has bounced considerably off its lows reached in March, as investors have bid up the stocks in anticipation of a recovery in activity somewhere late in 2009 or 2010. Those who were brave enough to buy when sentiment was terrible are now faced with the question of whether this rally will continue.
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A Time To Take Profits?
The temptation to take profits is compelling. The S&P Oil & Gas Exploration & Production SPDR (NYSE:XOP) closed at $23.41 on March 2, and it has since rebounded to $32.32 (as of May 1 close), nearly a 40% move. The S&P Oil & Gas Equipment & Services SPDR (NYSE:XES) closed at $14.64 the same day and has since had a similar rally to $21.39.
An analysis of the question of whether the stocks are at the start of a new bull market, or whether they will test the lows again, can be assisted by reviewing what management is saying about current conditions in North America. Activity that has at least stabilized would support the bull case.
No Clarity From Management
Terry Hall, CEO of Superior Energy Services (NYSE:SPN), said "With the speed at which pricing and utilization have fallen, one would logically assume that we are near a cycle bottom." Unfortunately, logic seldom comes into play in an industry with such intense cyclicality, and he could not put any timing on a recovery in North America.
Helmerich and Payne (NYSE:HP) is one of the largest land drillers in North America. CEO Hans Helmerich discussed the current cycle during the company's recent earnings conference call, indicating insufficient evidence to call a bottom in activity. Helmerich compared the situation to trying to catch a falling knife.
Glimmers Of A Bottom
Two other drillers did have something positive to say about the bottom in activity. Gene Isenberg, CEO of Nabors Industries (NYSE:NBR), said "We have seen a number of indications that the decline in our rig count is beginning to bottom out." Readers who are paying attention probably noted that the CEO said "our" rig count - not the industry in general.
Patterson-UTI Energy (Nasdaq:PTEN) competes with Helmerich and Payne in the contract drilling business. The company just reported earnings and is still experiencing a free fall in rigs working. Its U.S. rig count peaked in October 2008 at 285 and then proceeded to fall off a cliff, hitting 201 in December, 87 in March and finally 62 rigs working currently.
Despite this free fall in its rig count, management was positive about the current environment. Chairman Mark Siegel said that it was difficult to predict a bottom, but "during the last few weeks, our rig count has remained relatively steady." He also said he sees indications of demand for additional rigs late in 2009.
Bottom Line
Management commentary from energy companies' first-quarter earnings reports provide no clear view that a stabilization in North American activity is at hand. Investors who buy into a recovery must take it on faith that the cycle's self-correcting mechanism is still working and will eventually lead to a recovery.
Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?
