All is Forgiven in Love and War and Energy

Energy is back again as investors seem to have a short memory and despite weakness in North America, they are banking on international growth to bail out the Sector. Sounds a little familiar doesn't it? Here are the rest of the highlights from the Schlumberger call that caused the 10% one day drop. The stock has now recovered half of the loss. Transcript courtesy of Seeking Alpha

Once management comments ended, they were hit with a blizzard of questions on the outlook going forward:

The bane of all cyclical industries - too much capacity coming on line.

"I think pricing deterioration is still single-digit compared to last year. I think it will accelerate slightly in Q-4; and where the bottom is, I really don’t know, because what we have is a situation very different from 2001, in that the bottom is going to be created by additional capacity and not by a drop in the rig count."

And exactly how much extra capacity?

"So what is going to change the pricing profile is the additional capacity. And, you know, we, I’m not quite sure where we stand in the additional that was coming on. But, you know, when we looked at it a few months ago, it was certainly an increment in the high double, in the high teens, if not more."

On the margin effect:

"The biggest effect on margins in the Q-3 in North America was the lack of operating days in the Gulf of Mexico, due to precautionary evacuations, not from land. There was a deteriorating on land but it was not the major part of it. And, in terms of the pricing of services, other than pressure pumping, we have not so far seen the noticeable effect."

This next excerpt might have really panicked the street as Schlumberger almost seemed to be backpedalling on its growth forecast that it headlines at the beginning of every conference presentation.

"What I’m saying is that we won’t get a high teen growth rate in North America in 2008. Everywhere else, we probably will not be that far from it; but in North America we’re not going to get it. Now, what happens through the end of the decade, I, you know, I can’t speculate yet on North America specifically. The rest of the world, I’m perfectly confident."

And then they refused to confirm where the bottom is in North America:

"Overall, do you think that the North American EBIT in ’08 is going to be above, below or in line with the ’07 contribution?"

"Well, I don’t think I’m ready to answer that yet Geoff; but obviously, you know, if there is a big pricing impact on land, then it will have an effect."

"So a decline is a possibility?"

"It’s not excluded, no."

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.