Second quarter earnings and cash flow for exploration and production (E&P) companies are forecast to be “at or above record levels, up 0-10% sequentially,” according to a report by CreditSights energy consultants. Earnings are expected to be driven by continued commodity price and refining margin strength.

Led by expected strong earnings at ConocoPhillips, Amerada Hess and Devon Energy Corp., Brian M. Gibbons Jr. and Spencer Siino said other “key results/earnings calls” to watch include Valero, Anadarko, EOG Resources for “positive surprises and strategic advancement,” Murphy Oil for “key” development plan updates, and Kerr-McGee for a merger update.

“We continue to expect $35/bbl oil and $5.50/Mcf gas for the back half of 2004 versus consensus estimates of about $30/bbl and $4.75/Mcf gas,” said the consultants, and “we expect the Street to continue to upgrade estimates coming out of the quarterly conference calls and into the fall. Equities remain undervalued.”

Siino and Gibbons noted that West Texas Intermediate oil prices averaged $38.13/bbl in 2Q2004, 8.5% higher than 1Q2004 and 32.1% higher than 2Q2003, while natural gas averaged $6.16/Mcf, 7.3% above 1Q2004, and 7.1% above 2Q2003.

“Overall, as commodity prices continue to rise, so do earnings and cash flows. We expect the refiners to generate the largest earnings gains, followed by the integrateds, while the oilfield services group is likely to post the smallest gains given more moderate than expected increases on the producer spending side,” said the consultants. “The E&P group should come in flattish given seasonal production declines in the North Sea, U.S. Gulf Coast, and Canada.”

CreditSights’ analysis found that ConocoPhillps and “surprisingly, Hess, have the highest mid-cycle earnings power among our four-company integrated universe, each in the $4.95/share range, while Devon at $2.10/share has the greatest earnings power of the E&Ps, followed by a cluster of Apache, Anadarko and Occidental in the $1.30-1.45/share range.” Those with the “weakest” mid-cycle earnings power among the group include Murphy at $0.74/share and Kerr-McGee at $0.90/share (unadjusted for Westport merger).

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