10.19.14: Drilling Down into the Energy Sector

Thanks to Greg Harrison, of ThomsonReuters, this is how the Energy Sector earnings are distributed amongst and between the various companies:

Exxon-Mobil (XOM): 25%

Chevron (CVX): 17%

Occidental (OXY): 4.5%

Hess (HES): 1%

Total Integrated Oil & Gas: 47.5%

Schlumberger (SLB): 6.7%

Halliburton (HAL): 3.25%

NOV and BHI: 3.5%

Total Oil & Gas Equipment & Services: 13.5%

Oil & Gas Exploration & Production: 15.5%

Oil & Gas Refining & Marketing: 10%

 Remainder: 14.5%

Here is the Excel spreadsheet created from the Thomson Reuter’s data, created for your viewing pleasure: FC – Energy Sector (again, data courtesy of Thomson Reuter’s Greg Harrison)

When we have invested in Energy for clients, it has typically been the international, integrated oils, such as Exxon-Mobil (XOM) and Chevron (CVX), or the so-called “oil services” companies like Schlumberger (SLB), Halliburton (HAL) and Baker-Hughes (BHI).

Currently, we have no Energy positions for client accounts, and haven’t had for some time.

However, here are some thought we’ll leave you with as we do more fundamental homework on the sub-sectors in the next few months:

Exxon (XOM) and Chevron (CVX), are 42% of the Energy sector by earnings weight. If you want a low-risk way to play the sector and don’t want to try and time the sector too finely, you can buy either stock or the XLE (SPDR ETF), for which XOM and CVX are 39% of the XLE by market cap. Both these names should be less volatile than the rest of the Energy sector.

Chevron is currently testing its 200-week moving average, on our charts. Well off its $135 high from late July ’14, we often use the 200-week moving average as a low-risk entry point for stocks or sectors where we have been waiting to build positions. XOM’s 200-week moving average is $87 per share;

Our preferred oil services names like Schlumberger (SLB), Halliburton (HAL) and Baker-Hughes (BHI) are more levered to crude oil prices, and have fallen with the price. SLB and BHI reported earnings last week, and both stabilized with the reports, but I suspect that q4 ’14 and q1 ’15 earnings estimates for the group will continue to drop. If you look at our Weekly Earnings Update from yesterday, from the change in the forward estimates, I’m guessing that Energy sector estimates will not bottom until q1 ’15 results started to get reported in mid-April ’15. Given the levered nature of this sector to crude oil and nat gas, I will wait to re-purchase these names;

In the last correction for this group in 2012, BHI bottomed around $40, HAL around $30 and SLB between $60 – $70. North American margins have been driving the recovery in these stocks since then, but I don’t see how they remain unscathed from the 20% drop in crude oil in the last 3 months, particularly if OPEC is serious about curbing new supply. I thought I read on a Twitter post this week that Chevron has already curtailed one project announced last week, given the drop in crude;

No question the Energy sector is a “return to global growth play” which has been a theme of ours for some time. However, given what is happening in Developed Europe and South America, synchronized global growth seems to get delayed more and more;

Sector earnings estimates are not a timing tool: the forecasts I’ve seen for crude oil prices have been $75 per barrel, $80 per barrel, $63 per barrel and I even heard one forecast for $35. What I will be looking for over the next few months is for crude oil to stabilize for a period of time, and then I’ll be periodically updating readers on the Energy sector estimates, as I start to do more homework on the Exploration and Production names, which is one Energy sub-sector for which we have no coverage;

It is strictly my own opinion, but I think this drop in crude and Energy stocks will take some time to play out. Earnings estimates are NOT a timing tool, but there is no question we will be alert for stabilization in sub-sectors and individual companies. Look for divergences in sectors and sub-sectors and companies (sector estimates declining, company estimates improving) to drive fundamental homework.

Thanks for reading and stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

 

 

 

 

 

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