With January about to close out, we're starting to get a feel for the energy sector's prospects in 2016.
In this video segment, Motley Fool's Sean O'Reilly, Tyler Crowe, and Taylor Muckerman share what they'll be watching for this earnings season and the rest of the year -- from players to look out for, to production estimates, and more. Also, tune in for details on a new listener challenge!
A transcript follows the video.
This podcast was recorded on Jan. 28, 2016.
Sean O'Reilly: So we're going to do a little round-robin question for everybody: What storylines are you following in the most recent earnings season that is now well under way? Who goes first? Anyone? Draw straws?
Tyler Crowe: I'll go first. I follow Big Oil a lot --
Crowe: -- so I'm definitely going to be watching how the Big Oil players do this quarter, and how they start looking at 2016. Typically, we don't start to see their analyst day presentations where they release their budgets until like March, so maybe not for a couple --
O'Reilly: This is when they go to New York and do a little dance?
Crowe: Yeah. That's when we'll start to see what's going to happen in the coming year. But sometimes, you get a little bit of a hint of what's going on in their conference calls, or in the coming one. But at prices today, we've seen companies -- [Royal Dutch Shell], ExxonMobil, Chevron (NYSE:CVX) -- they've really been struggling meeting their capital obligations. Chevron especially, because they're spending so much on those large projects like Gorgon and Wheatstone. Are they going to be able to maintain it all the way through '16 without significant deterioration of their balance sheets?
O'Reilly: Cool. Taylor?
Taylor Muckerman: Continuing to watch margins. We have to continue to wait and see some normalization at the very least. I don't expect any expansion, but maybe the reduction in margins starts to slow down. And also, who cuts their dividend this quarter?
Crowe: [laughs] Somebody.
O'Reilly: Whose turn is it? [laughs]
Muckerman: Somebody's cutting their dividends this quarter; I just don't know who.
Crowe: Let's make that a game.
O'Reilly: Let's do that next week --
Crowe: No, let's make that a game for our listeners. Email us.
Crowe: Or tweet at us. Find us somewhere, and tell us what company you think is going to cut their dividend this quarter. We've got some Motley Fool swag sitting around.
O'Reilly: You will get, at the very least, a shout out on the show by name. It'll be awesome.
Muckerman: At the very least.
O'Reilly: Well, I don't know -- we can't guarantee swag without clearing it.
Muckerman: We could give a hat out.
O'Reilly: Fine, we'll give a hat out [laughs]. I'm particularly interested to see ... companies have been cutting a lot of capexes. We're all fully aware of this, hundreds of billions of dollars. However, this came along with some impressive efficiency gains last year, which pretty much kept production ... U.S. lost 500,000 barrels a day, but we're still over 9 million at last count. We're starting to see 2016 budgets come out, as Tyler mentioned, so I'm expecting deeper cuts, but I'm extremely curious to see where companies think their production is going to be for this year. This question came to mind for me because [Continental Resources](NYSE:CLR), led by the one and only Harold Hamm, came out and said they're cutting capex again this year by two-thirds or something.
Muckerman: Sixth-something percent, yeah.
O'Reilly: It's crazy. But they actually think their production is only going to drop something like 10%, and they think their natural gas production is going to go up. And I was like, "Whoa, whoa!" So, I don't know if they're an outlier, or ...
Muckerman: Because they're going to capture more of their flared natural gas [laughs].
O'Reilly: Yeah, or whatever.
Crowe: I'm slightly apprehensive.
O'Reilly: You think they're an outlier?
Crowe: It's not that I distrust anything that he says, but this is also a guy that, back in 2014 when oil started to decline, completely wiped out all of the hedges on his company to protect cash flow, saying, "This is unsustainable." Well, now we're 18 months later, and it's still going on.
O'Reilly: It's lower.
Crowe: It was a wrong bet. So I'd like to see him make some right bets before I really start to trust what's going on with him.