The oil price, as measured by West Texas Intermediate (W.T.I.), rose 42 % in the 12 months to 30 September 2018. This price appreciation can be largely attributed to a global supply glut coming to an end, and demand continuing to grow.
PwC’s Oil and Gas Trends 2018-19 report supports this view and states “Looking more closely at the recent short-term recovery, it seems to represent a recent rebalancing of market fundamentals, in a way that will make supply more challenging over the next few years. Oil supply growth has eased off, demand is robust, and inventory levels are finally eroding.”
Clay Carter, Macrovue’s Head of Investment Committee, examines three energy companies set to benefit from this shift in supply and demand fundamentals. An excerpt from his research is below.
Enterprise Products Partners (NYSE: EPD)
Enterprise Products Partners L.P announced on 5 September 2018 that it has begun construction of a new natural gas liquids (“NGL”) fractionator adjacent to its Mont Belvieu, Texas complex. The new unit will have a nameplate capacity of 150,000 barrels per day (“BPD”), giving Enterprise some 905,000 BPD of fractionation capability in the Mont Belvieu area, and approximately 1.4 million BPD companywide. The fractionator is scheduled to begin service in the first quarter of 2020. A quote from management sums up the rationale:
“The addition of our newest fractionator will facilitate continued NGL production growth, including from the Permian Basin where NGL volumes are expected to more than double over the next four years,” said A.J. “Jim” Teague, chief executive officer of Enterprise’s general partner. “This new fractionator will supply NGL products for the expanding petrochemical industry on the U.S. Gulf Coast as well as growing global demand for NGLs.” Teague added that the Permian Basin and the Eagle Ford account for approximately 70 percent of the domestic growth in NGLs. The new fractionator is supported by long-term customer agreements.
On 10 September 2018, Enterprise Products Partners L.P. announced that construction is under way to increase loading capacity for liquefied petroleum gas (“LPG”), primarily propane and butane, at the Enterprise Hydrocarbon Terminal (“EHT”) by 175,000 BPD, or approximately 5 million barrels per month. The expansion will bring total LPG export capacity at EHT to 720,000 BPD, or approximately 21 million barrels per month. Upon completion of this expansion project, EHT will have the capability to load as many as six Very Large Gas Carrier (“VLGC”) vessels simultaneously, while maintaining the option to switch between propane and butane loadings. Once operational, the expansion will allow EHT to load a single VLGC in less than 24 hours, which will create greater efficiencies and cost savings for customers. The extra capacity of some 30% is expected to be available in the second half of 2019. Enterprise is already the largest exporter of propane in the world.
Enterprise Products Partners returned +31.58% (AUD) in the year to 30 September 2018.
Schlumberger (NYSE: SLB)
Schlumberger beat EPS estimates in the third quarter of 2018. EPS came in at $0.46 versus expectations of $0.45. While this is just $0.01 above estimates, it’s 10% higher compared to Q3 of 2017. Total sales came in at $8.504 billion versus expectations of $8.593 billion - a US$90M miss. SLB says revenue from its international business gained 3% Q/Q to $5.2B while North America revenue rose 2% to $3.2B, the first time international revenue grew faster than North America sequentially since Q2 2014, as supply constraints in the Permian temporarily constrained hydraulic fracturing activity. On a Y/Y basis however, North America revenue rose 23% while international added 1%.
"With the outlook for global economic growth and oil demand remaining solid, we continue to see a need for a multiyear increase in international E&P investment, which is very good news for Schlumberger," the company said. SLB reiterated their guidance that the company’s top line abroad should grow by ~10% in 2019. This will be led by areas that are most depressed relative to the peak including Latin America, Asia and Sub-Sahara Africa. SLB management also expects these areas to lead the price recovery.
Integrated drilling contracts, which were a margin headwind this year, should be accretive to margins in 2019. International markets are expected to reach double-digit growth in 2019, with company guidance of $2 billion in capital expenditures. The company expects to be fully mobilised across markets by the end of 2018 and will potentially use its capital to expand drilling and completion capacity. Offshore/shallow-water activity is also showing signs of improvement, which will contribute to growth in 2018-19.
Schlumberger returned +5.37% (AUD) in the year to 30 September 2018. A return to growth in Schlumberger’s international business should underpin better performances going forward.
Halliburton (NYSE: HAL)
Halliburton’s sales rose 13% to US$6.17 billion for the quarter, beating the US$6.11 billion analysts expected, according to FactSet. Halliburton reported profit of US$435 million, or 50 cents a share, in the third quarter, up 19% compared with the same period last year. Analysts surveyed by FactSet predicted profit of 49 cents a share. Halliburton’s completion-and-production segment (its biggest), booked sales of US$4.17 billion in the third quarter, up 15% from the year-earlier quarter. But revenue from the unit was flat versus the second quarter. For North America, Halliburton said sales increased 18% from a year earlier, to $3.74 billion, but sales for the region contracted slightly compared with the second quarter.
Chief executive Jeff Miller said Halliburton believes the demand issues in North American are temporary. A range of demand catalysts—including higher commodity prices and expanding capacity—are in place, he added. Halliburton is deploying capital in North America to capture the region's increasing completion work, which likely will recover throughout 2019 as new pipe capacity comes online. Completion work slowed in 3Q and will remain challenged through the end of the year before picking up. International demand has started to accelerate and provides pricing and activity upside well into 2019.
Halliburton is still focused on boosting revenue in North America by growing market share through superior execution and technological innovation. Maintaining consistent margin will be challenged in 2018 as maintenance costs remain elevated in preparation for 2019 expansion.
Halliburton returned -2.78% (AUD) in the year to 30 September 2018. A bigger uptick in Halliburton’s completion business in North America and overseas should underpin better performances going forward.
You can invest in these companies directly through Macrovue’s Big Oil Vue.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances.
1 Past performance is not a reliable indicator of future performance.