Earnings have been a big part of the last two weeks in the energy patch. Although we have seen a number of beats, they haven't really resulted in big upward swings for the energy equities.
What's up with that?
Significant beats have been registered in the last week by Hess (HES), Noble Energy (NBL), Exxon Mobil (XOM), ConocoPhillips (COP) and Chevron (CVX), although much of the past week's outperformance has been much more attributable to the mini-rally staged by crude oil, which briefly fell below $89 but is now up close to $94.
Why have the earnings beats not led to greater gains in the stocks, and what does this tell us about investing in the space going forward?
As I've been saying for the past six months, in energy, it is not the previous quarter's results that really matter. The prospects for production growth and barrel costs going forward are what distinguish the better majors and large-cap exploration-and-production companies.
In the majors, Chevron's quarter again proved that this company is strongest at production growth and at holding the line at barrel of oil equivalent (BOE) price of recovery. Its outperformance compared with ConocoPhillips and Exxon Mobil will not, in my opinion, continue to hold up as Chevron drives deeper into Brazilian offshore assets. But neither will Exxon or Conoco be my forward-looking major of choice.
While Royal Dutch Shell (RDS.A) has the best portfolio of assets and growth profile in liquefied natural gas and in the Gulf of Mexico, it is mired in a continuing European malaise that refuses to let the stock respond to all the good that Shell is doing.
Instead, it is BP (BP) that I am looking at, since its strong Gulf assets are intact, and the prospect of an end to the Macondo civil suit in New Orleans is now on the short-term horizon.
In higher-beta oil plays, I can make a case for Hess, Noble and Occidental Petroleum (OXY). The problem has been in the nature of high-beta plays for the last year: These names are subject to wicked swings from both commodity prices and volatility prices. Noble remains by far my top pick in the space, but a mini-swoon in oil over the last two weeks dropped its price from new highs, and the stock again trades under $110, a more than 10% drop in less than four trading sessions. Even after the massive beat that Noble delivered, it still is slow to recover.
There is a now well-known market fetish for dividends trumping all other stock metrics, but that can't stop me from owning Noble Energy. I just get massively more oil production per dollar of stock price than with any of the dividend-producing majors.
And if I need a dividend, I'll go to BP -- at least there I see a trading potential for great upside.