PIRA: Energy firms expected to post strong 2Q earnings

Oil and gas companies are expected to post much stronger net income in the second quarter compared with overall industry consensus, according to PIRA Energy Equity Research (PEER), a division of New York-based consulting firm PIRA Energy Group.

The second quarter is shaping up to be one of the strongest earnings quarters for the industry with a convergence of higher crude oil and natural gas prices along with higher refining margins than compared with actual first quarter levels, PEER said.

"These factors should drive 2Q04 income levels above 1Q04 levels for upstream companies with unhedged production and for downstream companies with US coking and Northwest Europe refining capacity. The only challenge is the ability of downstream operations to recover higher feedstock costs in the marketing sectors throughout the world," PEER said in a June 14 research note.

Based on its market analysis, PEER said energy company earnings forecasts for the second quarter either are at or exceed the high end of the First Call consensus estimates for most companies.

First Call—a widely watched aggregation of Wall Street analysts' earnings forecasts—is provided by the Thomson Financial research firm.

"As the year goes on, we anticipate the analyst community will gradually increase commodity pricing assumptions to levels approaching the PEER pricing forecast and thereby increase their 2004 earnings estimates," PEER said.

Oil, gas income

PEER is forecasting that second quarter crude oil prices will increase by 11-20% over first quarter levels.

"Nigerian Bonny Light crude prices are up by 18% over 1Q04 levels, given the increase in demand for low-sulfur crude, especially in the US and Europe. Upstream companies with a high percentage of crude production in their portfolioUand with Nigerian productionUshould beat their current First Call average estimate," PEER said.

Companies with unhedged US and Canadian natural gas production also should experience improved earnings, PEER said.

"PIRA's natural gas forecasts for Henry Hub gas in 2004 and 2005 are over $6/MMbtu, well above other analysts' current forecasts. Companies that will benefit the most are those with a high percentage of unhedged gas production, including all the majorsUand independent upstream companiesUwith a high percentage of North American natural gas production in their portfolio," PEER said.

While upstream companies will benefit from higher feedstock prices, the downstream companies with US capacity are forecast to perform the best in the second quarter, the consultant said, adding that the refining-margin environment now favors independent refiners.