Oil and Gas Earnings Reports Fuel Market Rebound

Earnings season is nearly halfway over already—and it’s been a crazy ride so far. The S&P 500 has continued to fluctuate, but thanks to better-than-expected earnings from a number of companies, it is once again trending up. And I’m looking for higher levels through yearend.

While there are still a few weeks left in the third-quarter earnings announcement season, we’re going to wrap up our Market 360 earnings series today. But I’ll likely be back in touch with a few more updates in the weeks ahead.

So let’s get started by taking a look back how Microsoft (MSFT) and Seagate (STX) fared in the most recent quarter.

As we discussed in the October 23 Market 360 earnings series, Microsoft was expected to report earnings of $0.49 per share on $22 billion in sales. Well, the company beat earnings and sales estimates. Microsoft posted earnings of $0.52 per share on $23.2 billion in revenues. The beat was largely attributed to strong growth in the company’s Internet cloud-based offerings.

Seagate Technology released results yesterday that beat the consensus estimate. The company reported earnings of $1.34 per share on $3.79 billion in revenues, which is 3.87% annual earnings growth and 8.5% annual sales growth. Analysts were looking for earnings of $1.25 per share on $3.63 billion.

Now, let’s switch gears and consider the energy sector. Despite gasoline prices at the pump still hovering around $3 per gallon, crude oil prices have slipped below $80 per barrel this week. The slide in prices has been happening for a few months now—but what’s the main culprit?

First, production remains high, as oil producing areas like Saudi Arabia and Libya are taking extra precautions in case output gets interrupted due to geopolitical tensions. Second, the U.S. dollar has gotten its “mojo” back and this is pinching profits at many oil and gas companies. Third, seasonality is impacting prices, since energy prices typically slide in the fall. And finally, the American Energy Boom is helping to awash the world in oil.

So in this type of environment, should you avoid investing in energy companies? Not entirely. Yes, there are a few energy companies that could set you money on fire. But there are also others continuing to grow earnings and sales that could hand you substantial gains. Let’s take a closer look now…

Earnings Spotlight: Chevron

First up is a company that you should avoid. Chevron (CVX) is a global energy company, with businesses not only in oil and gas exploration and production, but also in chemicals, mining, power and technology.

In 2013, the company achieved average net oil-equivalent production of about 2.6 million barrels per day. It focuses its exploration efforts in West Africa, the Gulf of Mexico, offshore northwest Australia and the shale formations in North America.

Chevron will announce results from the most-recent quarter on Friday, October 31. The consensus estimate is for earnings of $2.56 per share on $52.97 billion in sales—which is down from $2.57 per share in Q3 2013.

What’s even more troubling is that analysts have revised their estimates 10.2% lower in the past three months. Typically, negative analysts’ revisions precede earnings misses. Avoid this D-rated stock.

Energy Earnings Scorecard

Kinder Morgan Energy Partners (KMP) released third-quarter financial results on October 14, missing earnings estimates and beating the consensus on sales. The company reported earnings of $0.32 per share, missing the $0.33 per share consensus estimate but up from $0.27 per share last year. Revenues increased 14.2% to $4.29 billion, above the $3.995 billion estimate. Estimates have been revised lower for the current quarter, so be cautious with this B-rated stock.

Schumberger (SLB) announced third-quarter earnings and sales after the closing bell on October 16. Schlumberger posted third-quarter net income of $1.95 billion, or $1.49 per share, on $12.65 billion in revenue. Compared with the year ago quarter, this worked out to 13.4% annual earnings growth and 9% sales growth. Analysts were looking for $1.46 EPS on $12.64 billion, so Schlumberger posted a 2.1% earnings surprise and a modest sales surprise. SLB shares rose following the report, and I advised my subscribers to sell the C-rated stock into the earnings bounce.

Baker Hughes Incorporated (BHI) also announced third-quarter results on October 16.  The company reported adjusted earnings of $1.02 per share on $6.25 billion in sales. The consensus estimate was for earnings of $1.15 per share on $6.292 billion in revenues. So the company posted a 12.75% earnings miss and slight sales miss. Avoid this D-rated stock.

Halliburton (HAL) revealed on October 20 that earnings per share increased 30.77% to $1.19, up from $0.91 per share. Revenue rose 16% year-over-year to $8.7 billion, up from $7.5 billion. Analysts were expecting earnings of $1.10 per share on $8.5 billion, so the company beat earnings and sales estimates. Halliburton also increased its dividend 20%. The earnings beat and the dividend lift support shares, which are up more than 5% since the report.

Hercules Offshore (HERO) met Wall Street expectations when it posted results from the third quarter on October 23. HERO reported a net income loss of $88.6 million, or $0.07 per share loss, which was in-line with expectations. Revenue was $221.9 million, beating the consensus estimate for $211.9 million. Avoid this F-rated stock.

Occidental Petroleum (OXY) also announced third-quarter financial results on October 23, but missed the consensus estimate. OXY reported earnings of $1.58 per share on $5.99 billion in sales, which lagged analysts’ expectations for earnings of $1.67 per share on $6.1 billion in revenues. Watch out for this D-rated stock.

Upcoming Energy Calendar

Tuesday, October 28

Andarko Petroleum (APC)—During the second quarter, Andarko increased oil equivalent production by 65,000 barrels per day and bumped up its dividend by 50% to $0.27 per share. For the third quarter, earnings are expected to grow 12.4% and sales should increase 11.4%. But I advise avoiding this D-rated energy company, as analysts have revised estimated 11 cents lower in the past 90 days.

Thursday, October 30

ConocoPhillips (COP)—ConocoPhillips currently earns a D-rating, I would watch this one carefully when it reports earnings this week. Analysts have lowered their estimates by 19.5% in the past three months, and are expecting $1.20 per share, which is down from $1.47 a year ago.

Friday, October 31

Exxon Mobil (XOM)—This C-rated oil and natural gas explorer’s shares are in the red so far this year, and Exxon Mobil’s prospects is a little scary for the most recent quarter. Revenue growth is expected to be in negative territory (-6.1%) and analysts’ have revised their earnings estimates 21 cents lower in the past three months.

Tuesday, November 4

ONEOK Partners (OKS)—In the most recent quarter, ONEOK missed estimates by 18.2%—and as a result, analysts have revised their estimates 12.5% lower in the past three months. Negative earnings revisions typically precede earnings misses. Watch out for this C-rated stock.

Valero Energy (VLO)—Here’s one bright spot: VLO is expected to grow earnings by 175% in the most recent quarter. While that’s down slightly from previous estimates in the past few months, I’d keep the B-rated VLO on your radar.

Up Next…

And that pretty much wraps up our month-long Market 360 earnings series. Thanks for tuning in this month—and I’ll be sure to be in touch over the coming weeks with more updates!

Sincerely,

Louis Navellier

Louis Navellier

*Please note that earnings dates can change. All expected earnings dates mentioned are accurate as of the publishing date.

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