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Third Quarter Earnings Preview: RIG, LNG and EOG

With third-quarter earnings season underway, we’ve been previewing energy companies before they report – letting you know what to expect.

We’re going to continue doing that today, as three major energy companies – Transocean Ltd. (NYSE: RIG), Cheniere Energy (NYSE: LNG) and EOG Resources (NYSE: EOG) – are set to report third-quarter earnings.

As was the case last week, all three companies represent different niches of the energy market: Transocean is the leading offshore drilling contractor and provider of drilling management services. Cheniere is at the forefront of the liquefied natural gas boom. And EOG is a giant in the realm of exploration and production.

We’ll start with Transocean, which is currently one of the most interesting stories in the energy sector…

Transocean’s Turnaround

Transocean was one of the companies that found itself in hot water during the 2010 Gulf oil spill, as it owned the rig that BP (NYSE: BP) was using to drill the Macondo well. That’s made the past few years rather tumultuous for the stock. But it appears to have finally found its footing – and it’s up about 20% year-to-date.

The reason is that demand for deepwater drilling equipment and services remains robust. New contracts and extensions resulted in  a backlog of about $8.1 billion in Transocean’s most recent fleet update summary. That includes a 10-year, $7.6 billion contract to build four new drill ships for Royal Dutch Shell (NYSE: RDS.A, RDS.B).

High demand contributed to a healthy second-quarter earnings report for Transocean. Revenue surged 10% year-over-year to $2.575 billion. Contract drilling revenue was up 14% in that period.

However, the company did take a net loss of $304 million in the quarter – the result of a $750 million non-cash impairment related to the Macondo incident. In all, the disaster may end up costing Transocean about $2 billion.

Finally knowing exactly how much Transocean owes will actually benefit the stock, as it will remove uncertainty. At least for the time being, we can use the company’s past earnings as a guide. And with its strong second-quarter showing and new orders building up, third-quarter results should be positive.

The average analyst estimate for the third-quarter checks-in at $0.77 a share. But don’t be surprised to see Transocean top that. It could easily surprise to the upside with a profit closer to $0.80, or even $0.90 a share.

The Middle-Man with a Long-Term Plan

Cheniere is another interesting story. So far, it’s the only company in the United States that’s able to export liquefied natural gas.

The company is set to begin operations at its Sabine Pass terminal in Louisiana in 2015, and will ship supplies out to clients such as London’s BG Group PLC (PINK: BRGYY), Barcelona’s Gas Natural Fenosa, GAIL India Ltd. (PINK: GAILF) and Korea Gas Corp.

In fact, demand for Cheniere’s services is so high that it’s already considering expanding the plant. The company may soon increase the facility’s export capacity from 18 million metric tons to 27 million.

You see, while natural gas prices in the United States are low, they’re markedly higher in other parts of the world where they’re tied to oil prices. Cheniere, however, is signing export contracts based on Henry Hub prices, which are linked to natural gas futures in New York. That means the company’s overseas customers pay 30% less than they would for supplies from Asia.

Indeed, low natural gas prices actually benefit Cheniere, since it’s a middle-man for exports – not a producer.

Of course, Cheniere has paid a heavy price to put itself in this position. The company reported a net loss of $73 million in the second quarter, with $35.7 million of that total going to the Sabine Pass terminal expenditures and pipeline development expenses.

Still, Cheniere’s future  looks quite bright. The U.S. government is expected to publish a key report on the potential effects of natural gas exports by the end of the year and industry support is growing rapidly.

The average analyst estimate for Cheniere is for a third-quarter loss of $0.27 a share, but that’s really a moot point. It’s all about the future with this company and its massive potential to cash in on the looming LNG export boom.

EOG Keeps Pumping

Lastly, we’re going to look at EOG Resources, which has been rock solid. Shares have soared 20% in the past year.

The crux of EOG’s success is the Eagle Ford shale, which is expected to be the most productive source of oil and gas in the United States for decades to come. EOG has rights to nearly 650,000 acres at Eagle Ford – from which it expects to extract 1.6 billion barrels of oil equivalent.

It also gets sizable contributions from the Marcellus and Bakken shale formations.

As a result, EOG’s revenue has increased by 49.6% on average year-over-year for the last four quarters. The biggest boost during that period came in last year’s third quarter, when gross income rose 82.4%.

However, it looks as though that fabulous streak will come to an end with today’s third-quarter report, as revenue is expected to drop by 4.4%.

Still, the consensus earnings  estimate  has risen from $0.94 a share three months ago to $1.05 per share currently. That would represent a 26.5% increase from the $0.83 per share the company reported a year ago.

Of course, with so much production and a considerable focus on natural gas liquids, I wouldn’t be surprised to see EOG check-in with earnings of $1.45 per share.

In fact, all three of these companies have a good possibility of surprising to the upside. And, better yet, all three make excellent long-term investment candidates.

So keep a close eye on them and we’ll keep you abreast of any new developments, too.

Cheers,

Jason Simpkins

Jason Simpkins