April 23, 2012
It was a painful open for the indices this morning as news out of Europe raised anxieties of more trouble for the continent. The first headline was from France, as leftist presidential candidate Francois Hollande scored a narrow first-round victory over incumbent Nicolas Sarkozy. The other big news was that the government in the Netherlands was close to collapse on Monday after failing to agree on budget cuts.
However, although the European debt mess is an ongoing issue, there is something more important happening this week that will quickly put the market and investors back in a good mood–earnings season.
Of the S&P 500 companies that have reported, more than 80% have topped consensus profit estimates—a bullish sign for upcoming earnings reports and investor profits.
That's why we're going to focus on what's important and continue our series on earnings season–and I promise that this week will not disappoint. There are no less than 25 big-name companies that are set to report earnings before the week comes to a close, and we're going to cover as many as possible.
Today, we're going to focus on three major players in the energy game. With prices on the rise and a recent history that brought record profits, these should be the safest bets on the market today. Right?
Not so fast.
I'll let you know exactly what's happening with these companies, why I think you should avoid most of them and which companies are actually profiting from higher energy prices.
Start the week off right with a special earnings edition of Market 360.
Gas prices are now a political issue, and while some blame the President and others blame oil companies, I think both are wrong—the anger and culpability should be focused more on the U.S. dollar than the oil industry. The production of crude oil is rising in the U.S., and the exports of refined products are now at a 62-year high. However, if the dollar drops 30%, the price of crude oil will rise 30% since crude oil is priced in U.S. dollars.
Of course, there are other reasons for high oil prices—the tension between Iran and the West that is turning into a big game of chicken as the world waits to see if Iran will blink, as well as supply disruptions of light sweet crude oil from political unrest in South Sudan and Yemen, and the fact that Libya is not back up to its original production before its civil war is keeping the upward pressure on Brent sweet crude and has many Asian buyers of sweet crude scrambling.
Plus, the demand for crude oil rises during the summer months, so no price relief is likely until global demand turns down in the fall when seasonal demand ebbs. Naturally, the prices at the pump are now a big political issue, especially since this is a Presidential election year, so high gasoline prices will likely remain in the news for the next several months.
So, with prices at the pump getting everyone all worked up, who's making money?
Let's take a look at three major oil and gas companies to see if any of the big players are worth owning now.
As the third largest integrated energy company and the fifth largest refiner, ConocoPhillips (COP) is a big player in the global oil and gas market. The Houston-based company has almost 30,000 employees worldwide spread across 30 countries. The company also diversifies its operations across four core segments – petroleum exploration & production, natural gas, petroleum refining & supply and chemicals & plastics production. The company operates 19 refineries and is responsible for the Conoco, Phillips 66 and the 76 line of gas stations.
In addition to being a globally recognized brand, ConocoPhillips attracts investors through its hefty 3.6% dividend yield and its steady track record of increasing dividend payments. However, lately the company has struggled to match its earnings performance from a year ago. Before the opening bell today, ConocoPhillips released lackluster first-quarter earnings performance. Compared with the same quarter last year, profits declined 3% due to weak refining margins. Adjusted earnings per share weighed in at $2.02, which missed the $2.08 per share consensus estimate. Over the same period, total revenues climbed less than 1% to $58.35 billion.
Currently, COP is a C-rated stock in my PortfolioGrader tool, and today's earnings announcement will probably cause its Fundamental Grade to weaken even further. With that in mind, I recommend that you hold off on buying shares of COP until this company can get a handle on its bottom line.
The second energy play I'd like to highlight is Hess Corp. (HES), which is a high-powered oil company that contends with the likes of BP and Exxon. Based in New York City, Hess Corp. is an integrated oil company. That means that the company takes care of all things related to oil and natural gas, from exploration to production to refining these fossil fuels. This company has been in the oil delivery business since 1933 and has since grown into a $21.7 billion empire that operates across six continents.
This company is slated to announce earnings before market open on Wednesday, but analysts are pretty pessimistic about Hess Corp. as well. Currently, the consensus calls for a -19.5% sales loss and a -17.6% profit loss. By comparison, the rest of the Oil & Gas Refining & Marketing Industry is headed towards 36.3% earnings growth. And, Hess Corp. has a history of lackluster earnings; the company has managed to miss earnings estimates in each of the past four quarters.
So, there's good reason that my PortfolioGrader tool gives this stock an F-rating. Unfortunately, the company just can't get a grip on improving its fundamentals, and buying pressure for HES remains at rock bottom. I consider HES a strong sell.
And then there's Chevron Corp. (CVX) another energy giant that has its hands in both oil and natural gas production. At the consumer level, Chevron is most known for its gas stations, but the company is involved in a range of energy plays. First, the company creates about 2.76 million barrels of oil per day for distribution across six continents. Chevron has most of its retail stations in the United States, western Canada and Pakistan. The company also runs the Texaco brand. In addition, Chevron also has a lubricants business, aimed at industrial and marine clients worldwide. Finally, the company runs a Pipe Line business that transports oil, natural gas, CO2 and other refined products throughout the United States.
Chevron Corp. is also announcing earnings later this week–before the opening bell on Friday. At this moment, Chevron is headed towards 20% sales growth and 4.9% sales growth. This is a bit stronger than HES, but still comes far below the consensus earnings estimate for the rest of the Industry, which is 36.3%. Over the past two months, analysts have upwardly revised their estimates by 8%. This, coupled with a history of modest earnings surprises, means that Chevron Corp. may have at least a positive earnings announcement. Nonetheless, because buying pressure for this stock remains somewhat lukewarm, I recommend that you hold off on adding shares of CVX. This company still has plenty of room for improvement in terms of earnings growth and surprises, so it is a C-rated stock.
|COP Stock Analysis|
|CVX Stock Analysis|
|HES Stock Analysis|
The numbers say it all, and I'm not a buyer of any of these companies right now.
But that doesn't mean that all is lost. Right now, the most important thing that we investors can do to profit from the high prices at the pump is holding strong refinery stocks. The companies that process oil and turn it into the products that run your car and house are making out like bandits. While their costs aren't 100% fixed, in most cases it costs them the same to make gasoline and diesel whether prices are at $3.00 a gallon or closer to $5.00 a gallon.
And the best part is that many of these refiners are small-cap stocks that, with just a little boost to profits and buying pressure, can take off and supercharge your profits.
My Emerging Growth service specializes in small-cap stocks, and we've been making big bets in the energy sector. Just this morning, we locked in a 33% gain in one refinery, and we've racked up a 51% gain and a 27% gain in two other refining stocks. And then there are the pipeline companies and the oil service and equipment plays we currently own.
I firmly believe that energy will be the No. 1 trend of 2012, but investors are going to have to remain selective in the stocks they buy. If you'd like some extra help buying and selling the hottest energy stocks, try my Emerging Growth service risk-free today.
If you liked today's earnings update, you are going to love tomorrow's. Apple Inc. (AAPL) will report earnings tomorrow, and I'm putting together everything you need to know about buying and selling AAPL stock.
Shares have been sliding lately, and it has some investors nervous. After all, a 10% decline in AAPL is the equivalent value of many small-cap companies!
We'll talk about this, what the company has in the pipeline and so much more.
This is an important Market 360 earnings series that you won't want to miss.