EARNINGS MISSES

Earnings season has come and gone, and the expectation that low natural gas and faltering natural gas liquids (NGLs) prices would cause pain came true, at least for some E&Ps. Leading off the shale-gas writedown fest were big boys BP, BG Group, BHP Billiton and Encana Corp., as noted in a Morgan Stanley research report in early August. Plenty of smaller companies followed suit, posting earnings and production misses in the days that followed.

Morgan Stanley tallied the write-offs as varying between $200 million and $300 million per trillion cubic feet of proved plus probable reserves. “BG Group lowered its long-term planning assumption from $5 to $4.25 per million Btu, which triggered a pre-tax write-off of $1.8 billion, or $1.3 billion post-tax,” the research report’s authors said. BP turned in charges of $2.1 billion, BHP had $2.8 billion in charges and Encana posted $2.5 billion.

As the independents began to report, the misses were worrisome to analysts and investors alike, even if they were expected. Also viewed as troubling were the capex raises that some reported, when production guidance didn’t also increase.

After just one week of the second-quarter earnings season, Wells Fargo Securities’ energy and utility team said that by year-end reserve reporting, “we would expect some meaningful reserve writedowns, thereby reducing Street perceived valuations.”

Master limited partnerships, long favored by investors, weren’t immune to commodity price ills. Linn Energy announced a slight miss on EBITDA and distributable cash flow due to lower realized commodity prices, including significantly lower NGL prices, according to Wunderlich Securities.

Still, the firm’s analysts like Linn’s production increases and hedging program. Linn shifted all its rigs in the Texas Panhandle portion of its Granite Wash acreage to drill the oil-producing Hogshooter zone, and it plans to keep on buying.

Crosstex Energy LP also had a significant miss on earnings, due to sharply lower NGL prices, noted Global Hunter Securities. “Both distribution growth and equity needs hinge on an improvement in cash flow, in our view,” GHS analysts said.

Some E&Ps emerged unscathed, however. And there were positive notes: Bakken-focused Continental Resources Inc. announced record production for the second quarter, besting its 2011 second-quarter production numbers by 76%. Production reached 100,000 barrels of oil equivalent per day in June. It earned $421.9 million of EBITDAX, 48% higher than the year-ago period, and increased net income as well.

Chairman Harold Hamm said the company is delivering higher production with fewer rigs (29 today, down from 44 in late 2011), and expects to hit its five-year production target during first-half 2013, 18 to 24 months earlier than the original plan.

On a less cheery note, its drilling and completion costs have trended higher. And, it increased its capex budget for 2012 to $3 billion—again, disappointing analysts.

Then there was EOG Resources, which Bernstein Research said “won the gold in the shift-to-liquids competition.” Its second-quarter earnings per share topped Bern-stein’s estimates and the consensus. Total production was 7% above the analysts’ expectations, as were liquids production and gas production. It realized less than expected for those liquids, especially NGLs (prices down 11% for NGLs, and down 3% for oil), but its natural gas fetched 3% higher than Bernstein expected. EOG increased its production guidance for the remainder of 2012 for both liquids and oil.

“Results continue to affirm that EOG is well ahead of peers in the shift to liquids,” the analysts said, “showing meaningful production growth while laggard shifters contend with the struggle of initial capex burdens.”

In addition to low natural gas prices, take-away capacity issues took a toll. But midstream companies made some announcements during the earnings season that buoyed hopes. Among them, DCP Midstream announced it would double its processing capacity in the ever-busy Denver-Julesburg Basin by the end of 2014. When the expansion is done, its gathering and processing assets in the basin will have a total capacity of 800 million cubic feet of gas per day and liquids production of 70,000 barrels per day.

In some cases, earnings results were not as bad as feared; in others, they were worse. How badly weak natural gas and liquids prices will wound companies will be more apparent by year-end. In the meantime, in storage reports and capacity-buildout announcements, there are glimmers of hope for an upward trend in natural gas prices.