Earnings reports failed to power energy stocks on Wednesday. Halliburton ( HAL), the big energy services firm known for its controversial contracts in Iraq, saw its shares slide after the company swung to a first-quarter loss despite a huge surge in revenue. Supermajor ConocoPhillips ( COP) also fell, even though it toppled analyst expectations. And power company Teco Energy ( TE) plummeted after falling well short of consensus estimates because of mild weather and operational setbacks. However, shrinking Dynegy ( DYN) -- the former trading powerhouse that once rivaled Enron -- provided a spark of excitement in the sector. The company's stock jumped on news of an unexpected quarterly profit instead of a slight loss. During the latest quarter, Halliburton saw its revenue rocket 80% to $5.5 billion -- topping the consensus estimate by $350 million -- after sales more than doubled at the Kellogg Brown & Root division that's performing work in Iraq. However, a big asbestos charge pushed the company to a $65 million net loss for the quarter. Profits from continuing operations, excluding yet another charge tied to a KBR project in Brazil, topped the 30-cent consensus by a penny. Yet KBR continues to operate in the red. The unit, hit by special charges on the troubled Brazilian contract, posted first-quarter losses both this year and last. And its most controversial projects continue to generate just razor-thin margins. "Halliburton's Iraq-related work contributed approximately $2.1 billion in revenues in the first quarter 2004 -- and $32 million in operating income," the company reported on Wednesday. In an earnings preview issued earlier this week, Merrill Lynch analyst Mark Urness had projected "improving profitability at KBR." He values the unit -- considered worthless by some -- at $4 a share and hopes to see it eventually sold off. Regardless, he recommends buying the parent's shares.
"We continue to see considerable upside for Halliburton's share price, given an improving fundamental environment for its strong energy services franchise," wrote Urness, who has a $35 price target on the company's shares. "Halliburton has consistently been our top pick among large-cap oil service stocks." The market was less enthusiastic. Halliburton shares slipped 1.3% to $31.25 after Wednesday's quarterly update.
"We had some challenges this quarter, primarily due to mild weather which impacted our electric utility and some operating setbacks at Teco Transport," explained CEO Robert Fagan. But "we are seeing signs that the stronger U.S. economy will contribute to improved results over the remainder of the year at many of our businesses." UBS analyst Ronald Barone was already cautious ahead of Teco's update. He did raise his 2004 and 2005 earnings projections for the company, because of the recent sale of some synfuel production assets. But he noted that Teco had slashed its cash-flow guidance for the year. He went on to say that capital expenditures have already been cut to "a bare minimum" and that the company is now relying even more on asset sales to fund the dividend. In general, he fretted over the challenges ahead. "Our concerns include a weak balance sheet, tight liquidity situation and threat of several potential write-offs," he wrote. "We reiterate our Reduce 2 rating." Teco's stock tumbled 4.6% to $12.79 -- still above Barone's $12 target -- halfway through Wednesday's session.
Investors saw reason to celebrate. They pushed shares of Dynegy up 6.1% to $4.18 after the latest quarterly report. Meanwhile, Dynegy itself applauded both its recent performance and the potential opportunities ahead. "Dynegy's first quarter was marked by strong operational performances from the company's power generation and natural gas liquids businesses," stated CEO Bruce Williamson. "We also continue to make progress in our self-restructuring initiatives and sharpened our focus on the company's unregulated businesses through the sales of non-strategic assets. "We believe the company's first-quarter operating performance shows that we are positioned to benefit from economic growth, the anticipated recovery of U.S. power prices and high natural gas prices." In the meantime, Dynegy this week put one of its old problems behind it. The company reached a settlement to end allegations that it overcharged customers during the California power crisis. It will pay $9.75 million -- its portion of a $22.5 million settlement with West Coast Power -- to wrap up the case. Credit Lyonnais analyst Gordon Howald this week praised the arrangement -- and the accomplishments by Williamson in general. "We view this as a key event for Dynegy, as it brings resolution to what many consider the most significant overhang remaining from the California energy crisis," Howald wrote. "We believe that Dynegy CEO Bruce Williamson has effectively scratched off another item from his 'to do' list with the settlement, moving one step closer towards creating shareholder value." Howald has a buy recommendation and a $6 target price on Dynegy's shares.