These are quite different companies, both in size and profile. Together they provide a picture of how things are currently going in different parts of the energy sector.
After a decline in June, the total energy sector recovered last month. So far in August, the Energy Select Sector SPDR ETF (NYSEARCA: XLE) is down 4.68%. The ETF tracks the large-cap S&P 500 energy sector. On a one-month rolling basis, the ETF is showing a gain of 5.36%. The difference is due to a drop in the week ending August 5.
Schlumberger is the seventh most heavily weighted stock in the large-cap energy sector, accounting for 3.95% of XLE’s assets. The six more heavily weighted stocks, with their one-month rolling returns, are:
It’s easy to see how the sector posted solid gains.
So what’s driving industry performance right now?
While US drivers are seeing lower prices at the gas pump, global demand for oil and gas remains high, while supplies are still somewhat limited. That has been the situation since the US and other Western countries imposed sanctions on Russian oil in the wake of the Ukrainian invasion in February.
Prices are getting lower
Despite their first weekly loss in more than a month last Friday, oil prices shot up again on Tuesday as the price of West Texas Intermediate crude, widely regarded as the domestic benchmark, stood at $88.88 on Wednesday morning. That’s significantly lower than the high of $124.76 on March 8.
On the one hand, lower prices could lead to increased consumption, not only by motorists in the US, but by industrial and commercial users around the world. On the other hand, lower prices can of course lead to lower returns for the energy companies.
Schlumberger shares moved higher on the heels of the company’s July 22 earnings report, but it fell again on August 3 and is now trading at its July 22 closing price.
The Houston-based oil and gas services giant earned $0.50 a share in the quarter, up 67% from the same quarter a year ago. Revenue increased 20% to $6.77 billion. According to MarketBeat’s earnings data, both the top and bottom lines beat the views.
In the earnings conference call, Schlumberger CEO Olivier Le Peuch cited several growth drivers, including strong international operations, stable drilling momentum in North America, ongoing offshore recovery and the increasing impact of improved pricing.
While the well-known large-cap companies like Schlumberger understandably get the most attention from investors, smaller companies can also show renewed signs of life.
transoceanic, with a market cap of $2.4 billion, also rose after the recent earnings report. Like Schlumberger, it also rallied and withdrew. However, it is up 10.83% this month, still high after that post-profit boost.
Here’s where things are a little different from Schlumberger’s: Although the company posted a loss of $0.10 a share, that beat views by a cent, Show MarketBeat data. In addition, revenue of $692.00 million exceeded expectations.
Transocean, based in Switzerland, provides contract offshore drilling services for oil and gas companies around the world. The company also takes partial ownership interests in offshore drilling units.
Years of underinvestment
In his quarterly conference call, CEO Jeremy Thigpen said: “While we have experienced volatility, commodity prices have remained within a range that is still extremely healthy for offshore development. Indeed, the outlook for our leading assets and services as the most promising the has been in many, many years.”
He noted the effects of several years of underinvestment in the replacement of oil and gas reserves and production growth amid varying pressures to replace fossil fuels with cleaner energy sources. As we all know, fossil fuels are not going to disappear anytime soon, and that underinvestment has led to higher energy prices.
While there are plenty of oil and gas-related investments, it’s important to evaluate whether you want to take the risk of a smaller stock like Transocean, which can be more volatile and less liquid, or if you prefer the relative stability of a big name that is part of the S&P 500. In the end it comes down to your goals, risk tolerance and the existing composition of your portfolio.