10.16.14: Energy Sector: A Look Ahead Before Weekend Revisions

Well, the thesis that we started the week with, i.e. that some of the large-cap Financial’s earnings reports for q3 ’14 would help stabilize the market, wasn’t such a great prognostication.

We’ve been underweight the Energy for several years, which helped our outperformance in 2013 (the Energy sector underperformed the 32% return of the SP 500 in calendar 2013) and it REALLY helped our numbers in q3 ’14. We are preparing performance reports for clients for the 3rd quarter presently, and the numbers look good. (We waffled on Energy during the 2nd quarter, 2014 here, but we never wound up adding any positions, outside of being long HAL, which we sold at $69 – $70.)

That being said, with Baker Hughes (BHI) reporting this morning and Schlumberger (SLB) reporting after the bell tonight, I wanted to show readers how the sector has performed in terms of earnings growth historically, and how the forward estimates look prospectively.

The international, integrated’s like Exxon and Chevron typically report near month end. By Monday morning, October 20th, the big three oil service companies of BHI, SLB and HAL will have reported.

As of last Friday, October 10th, the full-year 2014 expected earnings growth for the energy sector was +6.8%, down from 7.3% as of October 1, despite the drop in crude oil in the 3rd quarter.

For 2015, the full-year 2015 expected earnings growth for the Energy sector was +5.9%, vs 6.9% as of October 1, so it looks like analysts had pulled in their sails / numbers a little for 2015 already.

Here is the detail by quarter: (first column is as of October 10, 2nd column is the earnings growth estimate as of October 1)

Forward estimates:

q3 ’15: +12%, +12.7%

q2 ’15: +1.8%, +2.9%

q1 ’15: +1.3%, +2.3%

q4 ’14: +4.6%, +6.6%

q3 ’14: +5.3%, +6%

Actual Historical:

q2 ’14: +17%

q1 ’14: -0.1%

q4 ’13: -8.8%

q3 ’13: -7.5%

q2 ’13: -.85%

q1 ’13: 0.5%

q4 ’12: +6.4%

q3 ’12: -16.4%

q2 ’12: -18.1%

Our bearish take on Energy has been based more on perceived ultimately, slowing demand thanks to the growth in electric cars and hybrid vehicles, than growing supply. The point is, it truly is better to be born lucky than smart.

Either way, we’ll take it.

What is puzzling is that if you look at the years of negative earnings and revenue growth, the Energy sector didn’t perform that badly.

Maybe the incredible carnage we’re seeing in the energy sector today is prelude to a material slashing of numbers. According to one source, Schlumberger, the large-cap oil service company, lifted their 5-year capex program in June ’14, just as crude oil was peaking. The oil service companies all reported strong q2 ’14 earnings.

One thing we will focus on is the degree of revisions to the Energy sector estimates as we move through October and early November ’14.

Stay tuned: we will update the Energy estimates at the end of the month.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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