US Gas Drilling Slowdown Hits Supplier (KEX, BHI, XOM, CHK, EOG, RRC)

A major supplier of the engines and transmissions that drive the hydraulic fracturing (fracking) at US oil and gas wells announced this morning that it is reducing its second quarter and full year guidance. Kirby Corp. (NYSE: KEX) has lowered its second quarter EPS guidance from a range of $0.97-$1.02 to a new range of $0.80-$0.85, a drop of about -17%.

For the full year, Kirby cut EPS guidance from $3.85-$4.05 to a new range of $3.45-$3.70, a reduction of around 10%. The company’s CEO laid it on the line:

Our lower guidance reflects deterioration in the manufacturing area and softness in the oil field related engine and transmission sales and service and parts sales at United Holdings, our land-based diesel engine services operation. … While numerous negative issues have resulted in the lowering of our 2012 second quarter earnings guidance, for the 2012 year the primary difference between our low end guidance of $3.45 per share and high end guidance of $3.70 per share is the level of United’s oil field related business in the second half of the year.

Last week’s rotary rig count for the US fell by 5 according to Baker Hughes Inc. (NYSE: BHI), and the count for gas drilling hit a 13-year low. By contrast, oil drilling rig counts rose to a 25-year high.

Natural gas producers like Exxon Mobil Corp. (NYSE: XOM), Chesapeake Energy Corp. (NYSE: CHK), EOG Resources Inc. (NYSE: EOG), and Range Resources Corp. (NYSE: RRC) have cut gas rigs by 42% since October 2011 according to a report at Reuters.

Natural gas production has dropped by about 1 billion cubic feet/day so far, but that’s not nearly enough to slow the swelling inventories. If major supply reductions are going to come, they probably won’t start until it becomes crystal clear at the beginning of the winter injection season that there’s no storage for all that gas. Natural gas producers are hoping for a long, hot summer to draw down inventories as customers run air conditioners at full blast — but betting on the weather is a dubious strategy at best.

As for Kirby, shares are down about -2.5% in pre-market trading this morning at $49.80 in a 52-week range of $47.23-$70.61.

Paul Ausick