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Get Ready For a Fourth-Quarter Sale on Energy Stocks

Q3 a reflection of energy's challenges, potential

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With autumn upon us and the air starting to feel crisp, we know the end of the third quarter is close by — which means it’s time to look back and see how the energy patch fared during the past three months.

It was a doozy of a quarter.

While there weren’t any blowout earnings announcements or upside surprises — in fact, it was quite the contrary — there was plenty of activity in the sector. From hurricanes to major asset sales and acquisitions, the energy sector was abuzz with activity.

Overall, the oil patch was mixed as slowing global economic growth and falling futures prices for both natural gas and oil continued to have their way will firm’s bottom lines. Yet, broad energy sector measures — like the Select Sector Energy SPDR (NYSE:XLE) — saw prices rise as the fed unleashed a third round of quantitative easing, providing comfort to investors despite the sector’s lower guidance.

The latest quarter continued to highlight the challenges as well as the long-term potential facing the energy sector:

Falling Prices = Lower Earnings

Spilling over from the second quarter, stalling global growth continues to have its way with energy commodity pricing across the board. While there have been some recent price spikes — such as the flare-ups across the Middle East — prices for a range of fuels have drifted lower during the third quarter on excess supplies amid dwindling demand.

China’s declining production and the eurozone’s drop in manufacturing caused much of the price decrease, while speculation the U.S. and world would fall into a recession didn’t help either.

Overall, crude oil slipped to just $77.69 a barrel in June and natural gas is more than 70% below its all time high reached in 2008. The main energy commodities slumped as supply increases — due to the hydraulic fracturing boom making it easier to extract them — outpaced global consumption.

Those overall lower prices during the quarter have wrecked havoc on E&P earnings. A wide variety of firms, such as Occidental Petroleum (NYSE:OXY) and Devon Energy (NYSE:DVN), have reported generally lower earnings as these lower prices have taken hold.

Analysts now think income from the oil & gas sector will fall 24% for the three months ending in September. That decline would be the biggest decrease in three years, according to data compiled by Bloomberg. Earnings for the oil patch fell 17% between April and June after dropping 3.8% for the first three months of 2012. With prices for various natural gas liquids now declining, it could be a rough earnings season ahead.

Acquisitions Continue to Rule the Roost

As legacy wells dry up, the continued need to boost dwindling production drove another trend during the third quarter — acquisitions. We saw a host of blockbuster deals as many firms dove headfirst and snatched up quality fields at bargain prices.

The quarter started with a bang, as China’s biggest offshore oil and gas explorer, CNOOC (NYSE:CEO), agreed to pay roughly $15.1 billion for Canadian energy firm Nexen (NYSE:NXY). The deal — which is the latest in a long string of many for China — was deemed necessary to help turn the tide of the Asian Dragon’s growing long-term energy demand. Analysts estimate that China will continue to come back to North America to do its energy shopping for some time to come.

It’ll certainly have plenty of opportunities as beleaguered firms like BP (NYSE:BP) and Chesapeake (NYSE:CHK) continue divesting assets.

Article printed from InvestorPlace Media, https://investorplace.com/2012/09/get-ready-for-a-fourth-quarter-sale-on-energy-stocks/.

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