It now looks like Conoco perhaps should have hung unto Phillips 66. The newly independent refiner reported a 14% jump to profits during the second quarter as refining margins surged 53%. The company’s report highlights just how much refineries and chemical businesses benefited from the lower-priced feedstocks in the second quarter.
Then There’s BP
Beleaguered British Petroleum (NYSE:BP) can’t seem to catch a break.
The firm’s quarterly earnings fell 35% on weaker energy prices and falling production. That fall in production stems from the company’s “planned maintenance program” it launched in the wake of the Deepwater Horizon disaster in the Gulf of Mexico. An additional drag on the firm’s profits was TNK-BP. Net income for the joint venture was $700 million lower than a year ago. BP said this was because of the lag in Russian oil export duty, which was based on earlier higher oil prices.
BP announced back in June that it would pursue a sale of its 50% stake in the joint venture as corporate battles with the group of billionaire oligarchs has intensified. However, that sale could prove costly to BP’s future profits and earnings.
The Look Ahead
The main takeaway for investors is that falling energy prices are starting to have their way with the larger firms. That could spell trouble for those smaller E&P firms that do not have the same kind of cost efficiencies as the majors. Any continued trouble from Europe or slowing growth in emerging Asia could signal continued lower profits from the energy sector in Q3.
While there has been some bullish news with regards to natural gas pricing as of late, the overall tone of the third quarter should be muted. Investors should expect more of the same and use the time to double down on any long-term bargains that might arise during the next earnings season/quarter.
Focusing on exploration & production companies with strong cash flow and low relative debt remains the key to energy sector victory.
As of this writing, Aaron Levitt was long RDS.A and RDS.B.