After a lot of early-morning starts and late nights, with copious cups of coffee in between, our energy specialists have once again emerged from their earnings season cocoon. They are now taking the time to look back and reflect on the sector's performance this past quarter. Here's a look at the three companies that they were most disappointed in.
Tyler Crowe: The list of companies that disappointed this past quarter was pretty large, but if I can only pick one, then I will have to go with Chevron (NYSE:CVX). Of all the big oil players, Chevron's success is much more reliant on its exploration and production segment than the others. This means that the company is more susceptible to commodity price swings than its peers.
This was apparent in this past quarter's earnings. Even if we were to exclude the $2.5 billion in asset impairment and other charges it took in its upstream segment, then upstream earnings for the quarter came in at a paltry $311 million, a 94% decline from the same quarter last year.
It's pretty clear that the price of oil is, in large part, to blame here -- and that is not Chevron's fault. However, one thing that is of concern is that the company has not been able to begin the cost reductions it had planned to enact based on its analyst-day presentation back in March. Management said that this quarter, it had identified $3 billion in potential cost savings across its business segments, but it has yet to realize those savings in a meaningful way.
I get it... much of Chevron's future is tied to the successful start-up of the Gorgon and Wheatstone LNG facilities that are both slated to come online within the next 18 months. However, if the company is going to tie itself to production that much more than its peers, it needs to be able to produce better than its peers. Based on its quarterly earnings, it's not doing that.
Bob Ciura: My pick for the most disappointing oil stock is upstream exploration and production company LINN Energy (NASDAQOTH:LINEQ). I've been a Linn investor for almost two years now, through its financial holding company LinnCo (UNKNOWN:LNCO.DL), and as gut-wrenching as it has been to own the stock, the high distribution at least provided some measure of comfort.
Linn and LinnCo already cut their respective distribution and dividend once, and I thought investors were finally out of the woods, even at $50 oil. That's because Linn management had repeatedly stressed it could cover its payouts this year with underlying cash flow as a result of its aggressive cost-cutting and hedging practices.
Indeed, last quarter, Linn's lease-operating expenses declined by 18% versus the previous quarter. This helped Linn generate $71 million in excess operating cash after distributions last quarter, which was a good sign that the distribution was secure.
But as the old saying goes, if something looks too good to be true, it usually is just that. Linn's double-digit yield is about to vanish. The company recently stated it would continue to distribute its payout for the next two months, and then recommend to the board a complete suspension of the distribution at the end of the third quarter to save cash.
It's true that the suspension will shore up the company's balance sheet, which is a good thing. Linn will save $450 million per year, and plans to repurchase $599 million of senior notes at a steep 35% discount. This will help the company reduce its massive long-term debt load, which stood at $10.9 billion at the end of last quarter.
But again, investors were blindsided by this move. For that reason, Linn was a disappointment last quarter.
Matt DiLallo: I agree with Bob that LINN's distribution cut was a big disappointment; however, I understand the move for the reasons he mentions. The same can't be said for Whiting Petroleum's (NYSE:WLL) decision to cut its capex spending just weeks after increasing it. To me, it signals that the company's management team is being reactive instead of proactive in managing through the downturn.
For those not familiar with Whiting Petroleum, the Rockies-focused shale driller entered the year with a $2 billion capex budget. However, thanks to non-core asset sales this year Whiting has an extra $300 million at its disposal. The company announced on July 17 that it had decided to reinvest all of that cash into new wells, and would therefore boost its capex budget to $2.3 billion this year. However, on July 29 the company surprised investors by announcing that it was now reducing that budget to $2.15 billion.
The company gave no reason for the reversal, only noting that it was reducing its rig count from 11 to eight for the balance of the year, which would result in 6.5% production growth in 2015, down from 7%. Instead, the reduction seems to be in reaction to the recent drop in oil prices, especially during the last few weeks of July, as we can see in the chart below.
Clearly, Whiting Petroleum didn't expect oil to fall, leaving it with no choice but to react and quickly cut capex. While there is something to be said for being flexible, the company really should not have even considered an increase to its capex budget until the oil market is on firmer footing.
Furthermore, in my opinion, Whiting really shouldn't even be growing production into an oversaturated market. Instead, it should just keep production flat, and use any excess capital to bolster its balance sheet so it has ample capacity to grow when conditions do meaningfully improve.