This past earnings season brought surprises, disappointments, and future guidance. While positive earnings surprises do wonders for a stock, disappointing earnings or guidance can pummel a stock mercilessly. Sometimes these disappointments create opportunities for long-term investors willing to examine a company's business rather than its latest earnings. Here are two examples.
Drops on a positive earnings report
Typically, a good earnings report lifts a stock. So why did SandRidge Energy (NYSE:SD) sell off when it reported a profit when most analysts expected a loss? (Foolish contributor Matt DiLallo has an interesting take on the situation). While everyone was happy SandRidge posted a profit, investors may have been looking for reductions in capital expenditure, much like that seen at Chesapeake Energy (NYSE:CHK). After all, fiscal discipline, along with greater oil production and improved natural gas prices benefited the company and its shareholders. I once considered Chesapeake a "stooge" investment, but no more. The company is earning money, beating estimates and looking like it's turned the corner after years of disappointment. Fiscal discipline was lacking at SandRidge. In fact, the company's CEO implied SandRidge would continue its current capital expenditure plan to drive double digit production growth.
So what's the problem? SandRidge looks to hit a funding gap in 2016. During its recent earnings conference call, management sounded confident it can fund operations through 2015. After that, things could get interesting. While the company has almost $1 billion in cash, it also burns about $1 billion a year in capital and operating expenses. Analysts questioned how the company will pay for operations after 2015 with the company giving optimistic but non-committal answers. So doubts persist.
Can SandRidge generate enough revenue in the next two years to fund operations in 2016? Might just happen. The company's Mississippian Lime play generated 88% more oil than the previous year. SandRidge also brought 111 new wells online in the second quarter of 2013. Its cost per well dropped from $3.1 million to $2.95 million and its cost per barrel equivalent declined from $14.93 to $14.03 in the past 12 months. SandRidge also has wastewater disposal and electricity infrastructure in place to further minimize expenses. SandRidge claims its efforts to "thoroughly understand" the Mississippian Lime play will allow it to increase production without increasing capital expenditure.
One refinery shuts down and takes revenues with it
No question, the latest quarterly earnings report for Calumet Specialty Products Partners (NASDAQ:CLMT) disappointed and the stock suffered accordingly. Specifically, the stock dropped from a recent high of $36 a share to less than $29 a share. The main culprit: a planned 45 day shutdown/turnaround of its Superior, Wisconsin refinery, the company's second largest. This was responsible for roughly $26 million in extra expense and represented roughly 40% of the net income decline from the previous year. Another business expense was the increased cost of Renewable Identification Numbers for its fuels segment (if you want a headache, click here and learn from the Department of Agriculture about Renewable Identification Numbers). Lastly, declining spreads for West Texas Intermediate crude oil versus Brent affected earnings.
A major concern centers on Calumet's distributions. While the company typically enjoys a distribution ratio around 1.5, that ratio dropped below 1 over the past 12 months. Despite this, the company raised its distribution by half a cent, apologetically, and implied richer increases in the future. Other concerns are centered on the price of oil and the ability to pass along the higher expense. Calumet believes, going forward, its increased oil expenses can be passed on to customers.
Can Calumet bounce back? Several items suggest so. First, its Royal Purple division continues to enjoy increasing revenues. Revenue gains should continue as Walmart recently approved Royal Purple as a vendor. Second, Calumet recently announced the acquisition of midstream assets from Murphy Oil which will allow Calumet to buy more oil directly from producers in Montana and South Dakota, thus reducing oil costs. In an email, the company would not quantify the impact of either the acquisition or the Walmart deal but viewed each deal as "a clear positive for the business." Third, the EPA has acknowledged that its mandated renewable fuels standards may not be achievable, and this has led to a drop in the price of renewable identification numbers. Fourth, the Superior refinery is back online and will resume its contributions to earnings. Lastly, various refineries and production facilities will be expanded or upgraded in the coming two years with payback times ranging from months to four years.
Final Foolish Thoughts
Of these two companies, I like Calumet's prospects best. Current oil prices will certainly help SandRidge's revenues and future exploration activities. I suspect once the tension surrounding Syria dissipates, oil prices will decline and SandRidge will still be facing a funding gap in 2016. Calumet, on the other hand, suffered some big one-time expenses but has since closed deals that, well, are clear positives for its business. Currently, the company pays a 9% distribution and with the stock beaten down from one disappointing earnings report, I think this company has room to rebound with an attractive yield.
Robert Zimmerman owns shares of Calumet Specialty Products Partners, L.P, Calumet Specialty Products Partners September 21 2013 35 puts, Calumet Specialty Products Partners November 16 2013 30 puts and SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.