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 higher prices for its oil sands products and "strong results from natural gas operations." That's the good news. The bad news is that oil sands production dropped, operating expenses were up, and refining and marketing margins were down. Going forward, Suncor expects the price differential between WTI and its crude production to increase from C$2.55/barrel to as much as C$3.50/barrel. That's nearly a buck a barrel on daily production of an anticipated 240,000-250,000 barrels. Natural gas production is also expected to decline, from 228 million cf/d to between 210 and 220 million cf/d. The stock is now trading down over 2.5% in mid-day trading after shares had been up right after the open.

Enterprise Products Partners LP is one of the largest pipeline MLPs in the US, and it reported record quarterly income of $263 million, or $0.52/common unit. The company reported total indebtedness of $7.7 billion, with interest expenses totaling $96 million, a substantial jump from year-ago numbers of $5.9 billion of debt and $71 million in interest expenses. Enterprise attributes the increased debt to its capital investment program. The partnership also noted that total liquidity equaled $1.3 billion, including a $1.75 billion credit facility. Like all pipeline partnerships, Enterprise grows its distributions through leverage, so all these numbers are no big surprise. 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 $1.2 billion, which EnCana attributed to mark-to-market losses on its production hedges. Net income came in at $1.63/share, far below analyst estimates 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) is down more than $3.00 per share in mid-day after reporting record earnings of $183.3 million, or EPS of $0.91. The company noted that sequential revenue growth reflected "increasing investment in exploration and production programs due to strong commodity prices (in the US and Europe/Africa). That statement is probably what's hammering the stock this morning.

The recent downturn in crude prices is having, or will have, a substantial impact on every segment in the oil patch.  E&P companies like Suncor and Encana will have to deal with reductions in crude inventories.  US crude inventory levels have been dropping steadily, and China is expected to reduce its purchases of crude following next month's Olympic Games. Inventories of refined products are building, so refining and marketing margins will also get hit. Smith International faces a slowdown in new drilling, and the pipeline companies won't have as much oil to transport.

Inventories are the story going forward. The crude market is still in contango, but the gap between forward prices and spot prices is narrowing. In the short term, crude prices look to be softening. This does not help producers or service companies. Pipelines may experience decreased volume, but their regulated fee structures will help ease the pain.

Paul Ausick
July 24, 2008