You can learn a lot from a company's quarterly conference call if you listen carefully. Sometimes you can catch a glimpse of a future industry trend that you might have otherwise overlooked. This can give you an upper hand in choosing where to plunk down your investing dollars.
So far this earnings season energy investors have been treated to some very solid reports along with an overall positive future outlook. However, hidden in plain sight are comments which foretell trends that you don't want to miss. Let's take a look at three of my favorites and what they mean for investors.
The rails are making a difference in the Bakken
As I'm sure you've heard, crude oil shipments by rail were up huge last year. Overall shipments rose 46.3% over 2011. While this has been good to the bottom line of the rails, it's also helped correct the massive price disconnect between Bakken crude and U.S. benchmark West Texas Intermediate. Listen in to what Continental Resources (NYSE:CLR) President and COO Rick Bott had to say in his company's last earnings release:
We've recently seen a significant improvement in Bakken oil price differentials, reflecting higher volumes being shipped by rail to the coasts and the anticipation of increased pipeline capacity ... We now have excess transportation capacity in both pipe and rail, and, with additional infrastructure projects in the planning and construction stages, capacity should remain ahead of Bakken production growth.
This means one thing, Bakken producers are going to get more money for the oil that's produced. That's better for both margins and profits and something that investors don't want to miss. You also don't want to miss the end phrase of that quote. Capacity remaining ahead of Bakken production growth could squeeze midstream margins if we end up with more capacity than is needed. If nothing else, its something to keep an eye on.
The deepwater is a wellspring of profits
Judging by some of the valuations in the oil-field service and equipment space you'd think that the deepwater drilling business was as dry as the U.S onshore has been over the past year. That couldn't be further from the truth. Last year was actually the best year ever for deepwater drillers. Discoveries were up 40%, with a total of 52 discoveries across the world.
The thing is, few people noticed. Take the comments from National Oilwell Varco (NYSE:NOV) Chief Operating Officer Clay Williams:
Offshore drilling contractors steadily committed capital through 2012 to expand our deepwater fleets and we believe that this will continue through 2013. Our outlook for continued strong deepwater orders is a view that appears to be out of step with Wall Street's conventional wisdom, which seems likely to have convinced itself that deepwater rig ordering will slow. Candidly, we do not understand why.
This strength in the deepwater has helped to offset onshore weakness for the group. Schlumberger (NYSE:SLB) echoed this on its call by saying that "continued weakening of North America land margins was more than offset by strong activity and excellent performance in the Gulf of Mexico, where deepwater drilling activity reached pre-Macondo levels, as expected." Investors in general are completely missing this fact and under-pricing the sector.
Trouble in the Great White North
While producers in the Bakken and deepwater have reason to celebrate, those operating in Canada need to proceed with caution. Listen in to what Martin Craighead, the CEO of Baker Hughes (NYSE:BHI), has to say:
Many of our customers continue to deal with constrained cash flows from low natural gas prices and an abundance of projects that are marginally profitable. Our U.S. shale oil production, coupled with decreasing consumption and limited refining and pipeline capacity, is increasing differentials for heavy oil close to $40 a barrel. Considering that break-even prices for new heavy oil projects can be as high as $65 a barrel, we believe that some of these projects in Canada are at near-term risk. Given this, Canadian customers are focused squarely on conserving cash and increasing returns on capital. And until industry fundamentals change -- and the biggest driver to that is improvement and takeaway capacity -- Canadian activity will remain challenged.
Producers in the region will continue to suffer until pipeline and rail capacity catches up to production. This is where rail operator Canadian National Railway (NYSE:CNI) can really step in and make a difference. The company is planning to double its crude-by-rail business over the next year. One of the big moves the company is making is building a new terminal in the Gulf Coast so that Canadian producers can access that market and not hit the current bottlenecks at the Cushing, Okla., storage depot.
The key takeaway for investors
The energy industry is alive and growing. Unfortunately, it won't always be a smooth ride. That's actually good news for investors because you can get some pretty great bargains as others miss the turn. Listen to what these smart management teams are telling you so you don't miss the opportunities to profit from the growth while sidestepping the pitfalls.