Tuesday, October 23, 2007

Is the Energy Cycle Over?

I know its heresy to even suggest that a hot sector has seen the peak and I will no doubt be greeted by a chorus of cat calls and boos from the rafters, but is it possible that the Energy Cycle is rolling over? The market was down big on Friday, but the Energy stocks really got hit hard, spooked by an earnings report by Schlumberger. The market bounced back on Monday but Energy did not share in that rebound.

So what spooked the market so badly? Here are some excerpts from the call courtesy of Seeking Alpha:

First up were management comments on the North American market:

"North America pre-tax margin declined 427 basis points sequentially, to 26.9%, due to weather-related disruption in the Gulf of Mexico, the continued erosion of pressure pumping stimulation pricing on land in the US, and a reduction of exploration activity in the Alaska, partly compensated by re-bound in Canada after the second quarter Spring break-up. In North America, activity increased in Canada, but this was off-set by weaker pricing for pressure pumping on land in the US, and by a sharp revenue drop in the Gulf of Mexico, due to the departure of several rigs to overseas locations, and a loss of approximately 15 operating days, due to weather."

This wouldn't have caused a 10% decline in the stock. The market knew that pressure pumping pricing was weak and the down time from the Gulf was also common knowledge.

And then the first bombshell hits:

"In the immediate future, while there will be some recovery from the low activity levels in the Gulf of Mexico, natural gas activity in both Canada and the US is likely to stabilize, as production remains relatively strong and gas storage approaches winter at comfortable levels."

"As a result, pressure pumping pricing deterioration will continue. This situation, however, does not change our view that North American natural gas supply will require sustained activity to combat production decline, and advanced technology, to increase production rates from poorer-quality reservoirs."

I will post again tomorrow on the rest of the Schlumberger call. It will be interesting to see if the Energy Sector will catch a bid from the Apple earnings blowout from last night.

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