The results of energy earnings season may prompt Foolish investors to change their investing tactics in this patch of the market.
I recently described the dangers posed by declining production at many of the world's major oil fields. Now, in the past quarter, virtually all the world's major public exploration and production companies -- including ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), and ConocoPhillips (NYSE:COP) -- have reported lower crude oil production, based at least in part on "normal declines" in their fields. I continue to believe that this is a far bigger problem than most people recognize. It's also one of the reasons why respected energy seer T. Boone Pickens believes that, regardless of how rapidly world crude demand rises, global productive capacity may never materially exceed today's levels.
But let's look for just a minute at the earnings trends that seem to be emerging this quarter. We'll begin with the exploration and production side, then move to oilfield services.
The big one
Starting with the big enchilada: ExxonMobil's results were admittedly a bit of a hodgepodge, exacerbated by the expectation that analysts who follow the company will maintain ongoing per-share earnings estimates, even if they don't have sufficiently detailed information upon which to base them. When actual earnings miss expectations, as Exxon's did, the company receives a share-price drubbing. ExxonMobil's Achilles heel here was lower natural gas prices in Europe.
But the company's exploration and production sector also experienced a 17% decline in quarterly earnings. That's an important number, since lower production volumes were another of its causes.
Like ExxonMobil, Chevron received its big boost from the downstream (refining and marketing) area. Its crude oil production was 1% lower than a year ago; while not serious, that number is significant. But since production declines can occur for a variety of reasons that don't necessarily signal a trend, I'll be very interested in Chevron's production results next quarter.
Then there was BP. While the company has been beset by an almost absurd collection of maladies lately, I think it's important that its production on a barrels-of-oil-equivalent (BOE) basis fell 5% in the quarter. The company is expecting some new production to come onstream, but I'm not yet prepared to gloss over the past quarter's decline.
Bigger slippage
It was the same story at ConocoPhillips, where BOE production was down nearly 10% from last year. As with the other big oil companies, "normal field declines" was first among the identifieable reasons management cited for the drop-off.
Turning to the oilfield services portion of the energy sector, Schlumberger (NYSE:SLB) took the first shot, with earnings that approached 150% of last year's. But every bit as important -- as I told my Foolish friends when I discussed the company's results -- was CEO Andrew Gould's lucid overview of the major issues in today's energy world.
This quarter's issues included "an acceleration in the decline rate of the existing production base," inadequate industry investment as a result of the negative effects of shortages of people and equipment, and soft activity in Canada. Remember all three of these issues, but please focus on the first two.
Polar opposites
The next two largest energy service companies, Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), were on different sides of the road. Halliburton's earnings were strong, based largely on its redirection toward the Eastern Hemisphere, where energy activity is ascending. Baker Hughes' earnings from continuing operations were up slightly year over year, but were hampered by its North American operations. Baker was joined by Weatherford (NYSE:WFT), which is a solid oilfield services company, but with nearly half its business generated from a shrinking North American market, its quarterly income slipped.
So there you have it: decidedly mixed results thus far from the progressively more important energy sector. But there are a couple of apparent trends in the space that I'd like my Foolish friends to consider.
First, I don't know whether the big producers' universal slide in production levels is a trend or a blip. But I do agree with Pickens that it'll be tough to increase global production from current levels of about 85 million barrels per day to an expected demand of 120 million barrels a day by 2030. In the process, we'll have to overcome weakening production from major fields, higher production costs, and a daunting number of unstable governments in several of the world's producing nations.
And then ...
The second trend involves the continuing decline in production and drilling activity in North America. That trend seems unlikely to reverse itself, at least in the near term.
But what does all this mean for Fools in search of energy investments? Again, I have a couple of responses. First, the most recent quarterly results seem to have rendered the big integrated oil companies slightly less attractive than they previously appeared. I'm concerned that the production declines I've described in the past may be appearing more rapidly than was anticipated. The producers can't improve their lots solely on price increases; they need production gains as well, and those gains may be becoming hard to come by.
Second, I'd now look to the better-positioned (geographically) service companies as constituting the most attractive group within the energy sector. Their business (and I'm speaking mostly about Schlumberger and Halliburton here) will expand and shift as the requirements of energy production dictate. In the process, they will be less affected than the producers by ongoing production declines.
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Fool contributor David Lee Smith does own shares in Halliburton and Baker Hughes, but, unfortunately, not in the other companies mentioned. He welcomes your comments. The Motley Fool has a disclosure policy.
