Be Aware of Energy's Current Pecking Order

There are still several independent energy companies waiting in the wings to tell us about their quarterly results. But by now, enough news has been transmitted from the broad sector that Fools with backgrounds in following oil and gas companies probably have a sense of whether their funds are best deployed with the integrated companies, the services group, or the independent producers.

At your services first
This earnings season, the relative -- almost organized -- scheduling of releases by companies in the respective parts of the industry has been unusually pronounced. Two weeks ago, oilfield-services kingpin Schlumberger (NYSE: SLB  ) was one of the first companies to detail its successes for the second quarter of this year. With most of the Wall Street prognosticators clearly transfixed on the pullback in U.S. drilling activity resulting from plummeting natural gas prices, the big company topped the consensus per-share expectation by $0.05. Apparently the seers had let slip the recollection that Schlumberger, with operations in about 80 countries, was kept busy in Brazil, the South China Sea, Saudi Arabia, and the deepwater Gulf of Mexico, to name just a few of its active venues.

Essentially all the other services companies presented respectable results, to say the least. Some were indeed quite compelling, including National Oilwell Varco (NYSE: NOV  ) , a fast-growing manufacturer of rig equipment. Varco sits in a sweet spot, both from the standpoint of its participation in the important function of building and upgrading rigs, but also from the perspective that most of its products are intended for utilization in the world's busiest or newest areas of hydrocarbon production.

So while the services companies were the first out of the reporting chute, there's more than simply timing to recommend them. For my money, their geographic balance and long-term contractual perspectives render them a sensible inclusion in any Foolish energy portfolio.

You're next, major
Next came the international integrated companies, the majors. Most were affected by lower production rates, based on maintenance turnarounds, asset reductions, or other factors. Add to those declines the global commodity price reductions, and most of what is commonly referred to as Big Oil, undershot analysts' projections.

Most, that is, except Chevron (NYSE: CVX  ) , the second-largest of the U.S.-based majors.
The California company managed to make a mockery of Wall Street's forecasts, coming in a whopping $0.42 above the consensus. And while the company continues to tussle with recalcitrant locals in both Ecuador and Brazil, it nevertheless enjoys a $7-per-barrel margin lead over its peers. Further, it has confined most of its natural gas activity to overseas locations where prices are far higher and is expanding its presence in a host of other active areas, including the U.S. Gulf of Mexico.

Declarations by the independents
This week was effectively given over to reports by the independent companies, which, regardless of how impressive their results, seemed destined to be smacked by Mr. Market. Take Anadarko Petroleum (NYSE: APC  ) , for instance. Earlier this week, the Woodlands, Texas-based company -- the second-largest of the U.S.-based independents -- reported earnings that while below year-ago results (commodities prices again), exceeded analysts' expectations by a full $0.08, once one-time items were removed from the calculation.

The company's primary item for the quarter was a $628 million after-tax charge primarily from a price-related writedown of its coalbed methane assets. More important, however, was an 8.3% year-over-year increase in the company's production. The increase was related largely to increased output in Colorado and the U.S. Gulf of Mexico and had management boosting guidance for the midpoint of the company's production for the year by 3 million barrels to a range of between 261 and 265 million barrels. Despite its relatively strong quarter, however, the company saw its share price tumble by nearly 8% between the end of last week and the close of business Thursday.

The third-largest of the U.S. independents, Apache (NYSE: APA  ) , reported Thursday that, as was the case with the majors, Anadarko, and most other independents, its crude price realizations had fallen by slightly more than 8% for the quarter, while its average natural gas levy was down 35%. But unlike Anadarko, Apache's output was affected by unscheduled maintenance during the quarter, resulting in about a 16,000 slide in barrels of oil equivalent production for the quarter. As a result, its profit of $2.07 per share was fully $0.46 below analysts' expectations.

The Foolish bottom line
As reporting season for the energy sector winds down, I'm inclined to look harder than I might have in the past at geography and resistance to commodities price swings as key factors in where I place my energy bets. As you can ascertain from this quick rendition of the relative success of the groups that comprise the energy sector, I'm currently most impressed by the performances of Schlumberger, National Oilwell Varco, and Chevron.

At the very least, I urge you to monitor this threesome carefully, beginning by simply clicking on each of their names in the preceding paragraph, such that they'll be added immediately to My Watchlist. 

Fool contributor David Lee Smith doesn't own shares in any of the companies named above. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National-Oilwell Varco and Chevron. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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