This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Energy Stocks Face Their Own Fiscal Cliff

NEW YORK ( TheStreet) -- While the battle between Democrats and Republicans for the White House and Congress is very much up in the air, investors in the energy sector should prepare to fall off a fiscal cliff, regardless of how the vote unfolds in November.

Energy investors should prepare for integrated oil and gas giants -- and independent drillers -- to be constrained by high debts and spending levels, that may force CEO's to rein in exploration budgets sharply in 2013, impacting earnings across the sector.

Notably, as drillers try to extract what's been deemed a hundred year shale oil and gas resource, Chesapeake Energy (CHK - Get Report) has spent much of 2012 selling assets to meet a $14 billion cash crunch, in last-ditch financial moves that may speak to wider industry pressures as firms try to balance drilling budgets with earnings and debt levels.

Third quarter earnings may reveal that Chesapeake's financial constraints heading into 2013 are an overall industry concern, cutting at the earnings expectations of integrated oil giants like Hess (HES), specialized drillers like Cocho Resources (CXO), Continental Resources (CLR), SandRidge Energy (SD) and SM Energy (SM), and rig contractors like Halliburton (HAL - Get Report), Baker Hughes (BHI), Nabors Industries (NBR), Helmerich & Payne (HP) and Patterson-UTI Energy (PTEN)

At issue is whether drillers across the U.S. oil and gas industry can rationalize spending budgets that outweigh production growth to shareholders, or if they will begin to pull drilling rigs in favor of returning cash or paying down debts .

Citigroup analyst Faisel Khan estimates that across the bank's coverage of integrated oil and gas companies, overall oil production will likely decline 2% in the third quarter versus the second quarter - similar production declines are also forecast for 2012 overall. The problem is that while production and earnings are expected to fall, capital expenditure to drill new oilfields is expected to rise sharply this year.

Khan estimates total oil & gas earnings will fall 4% in 2012 relative to year-ago levels, while capex rises 12%, presenting a dynamic of falling cash and per share earnings for investors.

"With oil prices remaining persistently high, capex budgets are continuing to grow as companies strive to grow and replace production," writes Khan in a third quarter earnings preview. "This has not translated into profits however and we believe companies could start reigning in capital spending," the analyst adds.

Khan rates ConocoPhillips (COP - Get Report) as Citigroup's top pick in the oil and gas space, given forecasts of 5% production growth through 2015, as it farms its Eagle Ford shale resources and other oilfields internationally. Meanwhile, the newly split exploration unit is also likely to focus on paying shareholders an above average dividend yield. "We believe ConocoPhillip's focus on its dividend will result in increased capital discipline [versus] the exploration & production group," writes Khan.

Industry bellwether ExxonMobil (XOM - Get Report) may offset declining production and earnings by repurchasing shares in a move to engineer earnings per share growth that may please investors. Khan forecasts ExxonMobil will buy back $5 billion in shares this quarter, giving the largest driller in the U.S. an EPS of $2.02 versus previous estimates of $1.89.

In his earnings primer, Khan also sees production backlogs as reason to increase Citi's price target for Chevron (CVX) to $128 and to cut Occidental Petroleum's (OXY) price target to $82, on higher than expected spending.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
CHK $8.66 0.00%
COP $50.34 0.00%
HAL $41.79 0.00%
SLB $82.82 0.00%
XOM $79.21 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs