Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

• The Oil & Gas Equipment & Services industry in the S&P 500 consists of six companies: Baker
Hughes, Cameron International, FMC Technologies, Halliburton, National Oilwell Varco and
Schlumberger.
• The industry accounts for 1.52% of the S&P 500 index.
• In 2012, the oil & gas equipment & services industry underperformed the energy sector
(0.00% vs. 4.61%) and the S&P 500, which returned 16.00%.
• In 2013, the industry is outperforming the energy sector (17.42% vs. 15.63%) but
underperforming the S&P 500, which has a total YTD return of 19.84%.

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2Q 2013 Oil & Gas Equipment & Services Earnings Estimates

Company

Expected Report Date

2Q13

Estimate

2Q13 Est.

(90 days ago)

90 Day

Estimate Change

Halliburton

7/22/2013

$0.73

$0.70

4.29%

Schlumberger

7/19/2013

$1.10

$1.11

-0.91%

Baker Hughes

7/19/2013

$0.65

$0.67

-2.99%

FMC Technologies

7/23/2013

$0.47

$0.49

-4.08%

National Oilwell Varco

7/30/2013

$1.33

$1.44

-7.64%

Cameron International

7/25/2013

$0.78

$0.91

-14.29%

Source: The Earnings Scout

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The Earnings Scout offers customized reports that provide a unique view of underlying earnings trends that will help active managers exploit market inefficiencies.  Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • The oil & gas drilling industry in the S&P 500 consists of six companies: Diamond Offshore Drilling, Ensco PLC, Helmerich& Payne, Nabors Industries, Noble and Rowan.
  • The industry accounts for only 0.30% of the S&P 500 index.
  • In 2012, the oil & gas drilling industry outperformed the energy sector(8.13% vs. 4.61%) but underperformed the S&P 500, which returned 16.00%.
  • In 2013, the industry is underperforming the energy sector (8.05% vs. 12.65%) and the S&P 500, which has a total YTD return of 16.32%.
  • The drillers can be broken down into two broad based categories: Land or Onshore Drillers (Helmerich & Payne and Nabors) and Offshore Drillers (Diamond Offshore, Ensco, Noble and Rowan).
  • The U.S. land drilling market has been a drag on industry profits due to major Exploration and Production companies cutting back on capital spending, drilling efficiencies (i.e. drilling the same number or even more holes with fewer rigs).
  • As such, onshore drillers, like Nabors, are looking to international markets in Latin America and the Middle East to sell more rigs.
  • Deep water drillers make up the rest of the industry and we recommend finding one with accelerating earnings trends, which we show below, to add to your portfolio.

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2Q 2013 Oil & Gas Drilling Earnings Estimates

Company

Expected Report Date

2Q13 Estimate

2Q13 Est. (90 days ago)

90 Day Estimate Change

Helmerich & Payne

7/31/2013

$1.34

$1.32

1.52%

Diamond Offshore Drilling

7/24/2013

$1.24

$1.23

0.81%

Ensco PLC

7/25/2013

$1.52

$1.73

-12.14%

Rowan

8/5/2013

$0.54

$0.65

-16.92%

Noble

7/17/2013

$0.56

$0.71

-21.13%

Nabors Industries

7/23/2013

$0.15

$0.21

-28.57%

Source: The Earnings Scout

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On June 28th, Roulston Research hosted a roundtable discussion of the Oil Services industry with Mark Stanley and Phil Hyatt. Mr. Stanley founded Clearwater International in 1989 and served as president. He grew the business to $42 million in revenue before it was acquired by Weatherford in 2002. Mr. Stanley served as Group VP of Pumping and Chemical Services and Chemicals and Drilling Fluids, completing 12 acquisitions during his time there. He currently serves as the president of Themark Corporation. Mr. Hyatt has over 30 years of experience in the oil and gas industry, having worked for Nabors, Dimensional Petroleum Services, Conoco Phillips, Pool Offshore Company, and Gulf Offshore Company of Texas. Currently, he is the Managing Partner of Petronomics Partners of Texas, a consulting firm dedicated to providing economic analysis to oilfield service providers, contracting strategies and in-depth understanding of contractor cost structures and other important metrics. Mr. Stanley and Mr. Hyatt discussed several topics and trends in the Oil Services industry including an outlook of offshore drilling, shale gas both in North America and overseas, and the market for jackup rigs.

Both speakers had differing opinions regarding the future of offshore drilling. Mr. Hyatt, citing research by Wood Mackenzie believed that 95 new ultra-deep water rigs would be built between 2016 and 2022. Mr. Stanley disagreed, stating that that is an overly optimistic prediction by as much as 50%. He did not see enough demand for them in the future. A concern for offshore drilling going forward is that many integrated companies are concerned about running out of acreage. This is due to the fact that there are many state controlled oil companies around the world, and they have control of a vast majority of the reserves in their respective countries. Something the United States does not lack, however, is shale gas reserves. Thanks to these reserves and improving technology, we have enough natural gas to last about 200 years. This abundance of reserves allows us to compete better with Russia as a supplier to Europe. China, on the other hand, has many suspected reserves of shale gas, but lacks the technology needed to fully access them. While there is much public opposition to hydraulic fracturing, both speakers agree that technology has advanced to the point where a lot of the environmental harm is contained thanks to the use of guar and other non-harmful agents. In terms of the jackup rig market, approximately 35% of rigs in use are 30 years old or more. On the gas side, equipment age does not matter as much as long as the rig gets the job done. On the oil side, however, more horizontal drilling is necessary, which older rigs are not well equipped for. There are trade offs between newer and older rigs, and as a result, firms may get a discount for operating older rigs. If you would like to hear the whole podcast, or engage in a 1 on 1 discussion with Phil or Mark, please email info@roulstonresearch.com.

Bernanke spoke yesterday about ending QE purchases of Treasury bonds.  You could almost hear the blood draining from Jack Lew’s face at the prospect of taking those Treasuries to a market in retreat.  He’s going to have to do more than shutdown White House tours to Boy Scout troops (remember the horrors of Sequestration?) to cover the increased interest costs on new bonds. That one saved $17 million a year.

Jack’s problem is he might have to talk to “Ruchel” about her decision to take the kids to Europe and Africa on a summer vaca (cost ~$100 million).  That would be like Bill explaining one or another girlfriend to Hillary back when they pretended they were married.

Anyway, we have more pressing matters to discuss today – how bad things can get in the commodity complex over the next year.  We’ll focus on our beloved oil industry but the message carries.

Ben’s QE policies lifted asset values way ahead of market growth.  A lot of that went to the carry trade across the board.  Buy it, store it, sell the future, pocket the spread.

Lacking real demand from the real market, capex often went to building inventories. A lot of capex went to adding capacity for just that purpose.

How much capex?

Well, let’s talk oil where capex last year for the top 100 producers hit $316 billion – a record.  It rose some 18% year-over-year(!!!). Of that, ~$208 billion went to development.

We’re not down on expanding production to meet real demand.  But growth some 10 times demand growth is, well, speculative.  And why not speculate?  At zero interest rates (ZIRP), you’ve got a physical covered position – buy the stuff, store it, and sell futures or calls.

To put a number on it, how does 2 cents per barrel per month sound for a interest rate? Sounds pretty good to me.  Don’t get those kind of rates on my Shell gas card.

With a 3-month future running 30 cents per barrel to spot, a 90% leveraged deal earns 2.5% after costs – 5 times the yield on Jack Lew’s junk bonds, err, 10-yr Treasuries.

Thanks, Uncle Ben, for the financing and the profit.

When the presses shut down, however, things are likely to get ugly.  Think meth addict cut off from Heinsenberg’s Blue Crystal – yo!

Shutting down the presses begins to “undistort” markets, leaving excess capacity high and dry.  Interest rates go up (as they did today after Ben stopped talking), carrying costs go up, and margins collapse.

Lots of people did that math today across the complex as the realization that the party WILL end and maybe soon.  And the market sank.

What works with oil works with a lot of other commodities.  So, we expect inventories to start clearing real fast across the board.

Let’s put some numbers to this.  If crude inventories are cut to the 5-year average, ~50 million barrels will enter the market.  Done over 6 months, you get 275K barrels/day.

Or, roughly 1/3 of IEA’s projected growth in oil demand over the next year.

Now, remember we mentioned an 18% yoy growth in capex last year? Well, how’s all that capacity going to do with a lot less demand growth and no inventory to play the carry trade?

Can you say “Bubble Pop”? Sure you can.

Stephen Maloney is a partner at Azuolas Risk Advisors with over 30 years experience in the US and EU modeling risk and valuation in energy, FX, and other commodities. Stephen has led energy M&A teams for Fortune 100 firms over 15 years. He also routinely advises executive and credit committees concerning high risk ventures and capital investments. His clients include companies, hedge funds, and financial institutions actively marketing or trading physical and financial commodities and derivatives. To learn more about Azuolas Risk Advisors please visit http://www.azuolasriskadvisors.com/.

On May 22, 2013, Tesla Motors announced that it had paid back its $465 million loan to the Department of Energy, nine years before its full loan was due. Tesla was awarded the loan, requiring matching private capital obtained through public offerings, in 2010 as part of the Advanced Technology Vehicle Manufacturing program. This program was signed into law by President George W. Bush in 2008, but the awards were made by the Obama administration. While another electric vehicle company under this program is in trouble (e.g. Fisker Automotive), Tesla is not. Tesla Motors is different for a number of reasons that include: a recent increase in the value of its stock along with the sale of new stock and debt securities earning about $1 billion, way more than it needed to repay the loan, an enviable stash of environmental credits from the state of California that is valued at $250 million for this year, and the deep pockets of Elon Musk, Tesla’s co-founder. The company sold 2,650 vehicles in 2012 and expects to sell 21,000 year end, selling 4,900 during the first quarter of 2013 of its newer, lower cost Model S sedans. For the first time in its 10 year history, the company reached profitability, generating a profit of $11.2 million during the first quarter of this year. Electric vehicles still have a long way to go to catch up to sales of traditional gasoline and diesel powered vehicles. During the first four months of 2013, plug-in cars accounted for less than 1 percent of total vehicle sales. And one thing is abundantly clear from Tesla’s financial experience with electric cars: thus far, this is a market created by the government, and without the government’s powers, it would not exist. To read the full article please visit http://www.instituteforenergyresearch.org/2013/05/24/tesla-motors-specious-rise/.

 

Thomas J. Pyle is the president of the Institute for Energy Research (IER). In this capacity, Pyle brings a unique backdrop of public and private sector experience to help manage IER’s Washington, DC-based staff and operations. He also helps to develop the organization’s free market policy positions and implement education efforts with respect to key energy stakeholders, including policymakers, federal agency representatives, industry leaders, consumer entities and the media. To learn more about the Institute for Energy Research and their mission please visit http://instituteforenergyresearch.org/.

Roulston Research recently held their energy roundtable on May 2nd with Michael Biehl, Executive Vice President and Chief Financial Officer of Chart Industries, as he talks about Chart’s unique position to play across the whole natural gas industry, from liquefaction to delivery, storage and use. Prior to joining the Company, Mr. Biehl served as Vice President, Finance and Treasurer at Oglebay Norton Company, an industrial minerals mining and processing company, as well as in the audit practice of Ernst & Young LLP in Cleveland, Ohio from 1978 to 1992. Michael discussed the outlook for domestic and global natural gas and LNG markets and discussed growth opportunities in the space. From an operational standpoint, Chart Industries have three global business segments: (1.) Energy & Chemicals, (2.) Distribution & Storage, and (3.) Biomedical and more than half of the company sales are outside of the US. In addition, more than half of sales are made to the energy markets.

The company expects strong growth in their distribution & storage market, while industrial gas seems to remain flat overall, as well as in Asia and Europe. Growth is expected to generate from Natural Gas, which presents an opportunities for those companies who are strategically positioned to leverage this growth. China seems to be ahead of the U.S. supply in natural gas and proclaims to double their natural gas market to 4.8%. Chart’s manufacturing facilities are strategically located in lower-cost countries to provide operating leverage and centered near demand. The company just expanded operations in China and is expected to expand some more, as  petrochemical companies have  jumped on board under the impression that liquefied natural gas (LNG) will be a large source of fuel in China, given the expected growth. China doesn’t currently have a pipeline infrastructure and a lot of natural gas fields; China has more shale gas than the US and is just starting to tap into it. As mentioned LNG is expected to grow and is in high demand for trucks, pressure pumping, and drill rigs, while passenger cars, and short deliveries, are ripe of compressed natural gas (CNG) opportunities. One of the interesting points of discussion is the strategic positioning made by non-competitor into the natural gas space due to the significance of the LNG natural gas market. A good example mentioned is Lockheed Martin move in to the market despite limited experience. As stated in their 2013 investors presentation, Chart Industries is one of the leading suppliers in all primary markets served, and is positioning its operations to capture growth opportunities wherever they may be found.  Distribution & Storage is growing $60 million in China alone, while their heat exchangers will grow about roughly $350 to 360 million through exports to china. If you are interested in listening to the podcast from the event or following up with Michael, please contact info@roulstonresearch.com.

We all know of the shale oil boom in the United States that has produced an explosion in domestic oil production primarily on private and state lands and helped to decrease our dependence on oil imports. The shale oil (and shale gas) revolution is a testament to what happens when people are allowed to explore for oil resources. People have known for decades that the Bakken and Eagle Ford contain oil, but the only reason these areas are so prolific today is because people can access the resources. Oil shale, on the other hand, is sedimentary rock that contains kerogen, a solid organic material. When the kerogen is heated to high temperatures, it releases petroleum-like liquids that can be processed into liquid fuels. Shale oil resources are spread over much of North America, but oil shale is concentrated primarily on federally owned lands in the western United States in Utah, Wyoming, and Colorado. The USGS estimates our oil shale resources to be even greater than our shale oil resources. The United States has 2.6 trillion barrels of oil shale in-place, with about 1 trillion barrels that are considered recoverable under current technological conditions. Before leaving office, the Bush administration offered to lease these resources for research and development that could lead to commercial development but they were withdrawn by the Obama administration. Estonia, for example, produces 90 percent of its electricity generation from oil shale while China is the world’s largest producer. Current oil prices should be high enough to encourage the development of the technology to bring those resources to market if only access were not restricted. Technically recoverable oil shale resources in the United States could provide Americans with 140 years of oil shale at current usage rates. To read the whole article please visit http://www.instituteforenergyresearch.org/2013/05/02/oil-shale-development-in-the-united-states-and-abroad/.

Thomas J. Pyle is the president of the Institute for Energy Research (IER). In this capacity, Pyle brings a unique backdrop of public and private sector experience to help manage IER’s Washington, DC-based staff and operations. He also helps to develop the organization’s free market policy positions and implement education efforts with respect to key energy stakeholders, including policymakers, federal agency representatives, industry leaders, consumer entities and the media. To learn more about the Institute for Energy Research and their mission please visit http://instituteforenergyresearch.org/.