Oil Patch Results Seeing Very Mixed Reviews (SU, EPD, ECA, SII)

Before today’s opening bell, four players in the oil patch released their second quarter numbers.

Suncor (NYSE:SU), Enterprise Products Partners (NYSE:EPD), EnCana (NYSE:ECA), and Smith International (NYSE:SII) all posted good numbers, but the outlook with the recent fall in prices is not so clear.  The next trend in prices of those stocks is also becoming unclear.

Suncor posted EPS of C$0.89, substantially above estimates of$0.71/share. The company attributed the earnings increase to higherprices for its oil sands products and "strong results from natural gasoperations." That’s the good news. The bad news is that oil sandsproduction dropped, operating expenses were up, and refining andmarketing margins were down. Going forward, Suncor expects the pricedifferential between WTI and its crude production to increase fromC$2.55/barrel to as much as C$3.50/barrel. That’s nearly a buck abarrel on daily production of an anticipated 240,000-250,000 barrels.Natural gas production is also expected to decline, from 228 millioncf/d to between 210 and 220 million cf/d. The stock is now trading downover 2.5% in mid-day trading after shares had been up right after theopen.

Enterprise Products Partners LP is one of the largest pipeline MLPs inthe US, and it reported record quarterly income of $263 million, or$0.52/common unit. The company reported total indebtedness of $7.7billion, with interest expenses totaling $96 million, a substantialjump from year-ago numbers of $5.9 billion of debt and $71 million ininterest expenses. Enterprise attributes the increased debt to itscapital investment program. The partnership also noted that totalliquidity equaled $1.3 billion, including a $1.75 billion creditfacility. Like all pipeline partnerships, Enterprise grows itsdistributions through leverage, so all these numbers are no bigsurprise. The unit price is up under 1% in mid-day trading.

EnCana focused its earnings report on an increase in its cash flow to$3.85/share, or $2.9 billion. The company net income was down by $1.2billion, which EnCana attributed to mark-to-market losses on itsproduction hedges. Net income came in at $1.63/share, far below analystestimates of $1.84/share. Still, the stock is trading down by 0.7%after having been up over 1% after the open today.

Finally, oilfield services company Smith International (NYSE:SII) isdown more than $3.00 per share in mid-day after reporting recordearnings of $183.3 million, or EPS of $0.91. The company noted thatsequential revenue growth reflected "increasing investment inexploration and production programs due to strong commodity prices (inthe US and Europe/Africa). That statement is probably what’s hammeringthe stock this morning.

The recent downturn in crude prices is having, or will have, asubstantial impact on every segment in the oil patch.  E&Pcompanies like Suncor and Encana will have to deal with reductions incrude inventories.  US crude inventory levels have been droppingsteadily, and China is expected to reduce its purchases of crudefollowing next month’s Olympic Games. Inventories of refined productsare building, so refining and marketing margins will also get hit.Smith International faces a slowdown in new drilling, and the pipelinecompanies won’t have as much oil to transport.

Inventories are the story going forward. The crude market is still incontango, but the gap between forward prices and spot prices isnarrowing. In the short term, crude prices look to be softening. Thisdoes not help producers or service companies. Pipelines may experiencedecreased volume, but their regulated fee structures will help ease thepain.

Paul Ausick
July 24, 2008