Energy review: Continental down
The past week brought a smattering of earnings releases in the energy sector, prompting one downgrade, explained in detail below. Reports of surging production dragged down oil prices, putting pressure on the entire group. Still, some uncertainty was lifted for drillers in Colorado after state lawmakers scrapped plans that would have let residents vote on tougher drilling restrictions in November.
Continental Resources ($146; CLR) said June-quarter earnings per share increased 13% to $1.50 excluding special items, missing the consensus of $1.70. Losses related to derivatives caused total revenue to slip 19%, though sales of crude oil and natural gas increased 29%. Total average daily production jumped 24%, while average sales price increased 5% excluding the effects of derivatives.
Although the stock still appears to offer above-average potential, Continental no longer ranks among our top picks in a group that includes EOG Resources ($109; EOG) and Whiting Petroleum ($86; WLL). We see more attractive values in Whiting (Value score of 56, trailing P/E of 19, forward P/E of 17) and EOG (60, 24, 19) than Continental (48, 26, 21). Continental, up more than 45% since we initiated the stock as a Long-Term Buy last September, should be sold. Continental is now rated A (above average). Whiting is a Focus List Buy and a Long-Term Buy. EOG is a Buy and a Long-Term Buy.
EOG Resources earned $1.45 per share excluding special items in the June quarter, up 38% and $0.08 ahead of the consensus. Total revenue rose 9% to $4.18 billion (21% excluding the effect of derivatives), with sales of crude oil up 30% to $2.62 billion. Operating cash flow crept 2% higher to $1.93 billion, marking the sixth straight quarter of growth. Total production climbed 17%, prompting management to boost its full-year production guidance. EOG's trailing 12-month free cash flow has been positive in each of the past three quarters after at least four years of negative flows. The company hiked its quarterly dividend 34% to $0.1675 per share, payable Oct. 31. EOG has now raised its dividend twice in 2014 and 16 times in the past 15 years.
Helmerich & Payne ($104; HP) shares slumped after the contract driller posted its first profit miss since the March 2012 quarter. Per-share profits rose 12% to $1.61 excluding one-time items, two pennies shy of the consensus. Sales rose 13% to $952 million, slightly ahead of the consensus, as 15% growth for U.S. land drilling more than offset a 7% decline for the far smaller overseas land unit. Operating profit margins slipped, and H&P conceded rig margins could remain under pressure in coming quarters.
Still, some encouraging news came out of the report. Demand remains strong, with rig utilization reaching 88% in the June quarter, up from 83% from the year-ago quarter. H&P has signed multiyear contracts to build and operate 30 more rigs since the end of March. H&P also expects day rates to rise in the September quarter. H&P, earning an Overall rank of 92, remains a Buy and a Long-Term Buy.
For the June quarter, Cognizant Technology Solutions ($44; CTSH) earned $0.66 per share excluding costs related to stock-based compensation and acquisitions, up 14% and exceeding the consensus of $0.58. Sales advanced 16% to $2.52 billion, in line with the consensus.
Despite solid results, the stock plunged after Cognizant cited weakness with some clients and trouble completing larger deals. Management maintained its 2014 per-share-profit guidance but trimmed its sales outlook to at least 14% growth, versus its prior target of 16.5%. Growth of 14% would be the slowest in the company's 20-year history.
The guidance is disappointing, but the sell-off seems overdone, pushing Cognizant's trailing P/E ratio to 19, a 15% discount to its three-year average. With an Overall rank of 92 and both sector scores in the 90s, Cognizant remains a Buy and a Long-Term Buy.
CVS Caremark ($77; CVS) grew per-share profits 16% to $1.13 excluding special items, easing past the consensus by $0.03. Revenue increased 11% to $34.60 billion, also ahead of the consensus, on growth of 16% at the pharmacy-benefit unit and 5% at the retail business. Same-store sales increased 3.3% despite softer customer traffic and the discontinuation of cigarette sales; pharmacy sales accounted for all of the growth, with front-end sales down slightly on a same-store basis. For the September quarter, management expects earnings per share of $1.11 to $1.14, implying 6% to 9% growth, versus the consensus of $1.13. CVS also raised its full-year guidance for per-share profits and operating cash flow. The stock is a Buy and a Long-Term Buy.
Quanta Services' ($33; PWR) per-share profits rose 13% to $0.43 excluding special items in the June quarter, topping the consensus by a penny. Quanta said sales surged 27% to $1.86 billion on growth of 52% for oil and gas infrastructure and 18% for electric power infrastructure. Quanta expects September-quarter earnings per share of $0.57 to $0.59, compared to the consensus of $0.56 at the time of the announcement, implying growth of 33% to 37%. Quanta is a Buy and a Long-Term Buy.
Union Pacific ($98; UNP) raised its quarterly dividend 10% to $0.50 per share, payable Oct. 1. Management has raised the dividend at double-digit rates three times since the start of August 2013. Union Pacific is a Focus List Buy and a Long-Term Buy.
Bank of America ($15; BAC) gained approval from the Federal Reserve to raise its quarterly dividend to $0.05 per share, payable Sept. 26. While other big banks have rebuilt their dividends in the years since the financial meltdown, Bank of America's dividend was stuck at $0.01 per share. Bank of America, which is reportedly close to reaching a settlement with the Justice Department regarding mortgage-related misconduct, is rated B (average).
Apple ($95; AAPL) will show off its new iPhone on Sept. 9, according to published reports. Separately, China, citing security worries, has reportedly excluded iPads and MacBook laptops from a list of devices to be purchased with government funds. In other news, Apple and Samsung Electronics agreed to drop all patent lawsuits against each other outside of the U.S. Apple is a Buy and a Long-Term Buy.
Walgreen ($69; WAG) will move forward with acquiring the remaining 55% stake in U.K. retailer Alliance Boots for more than $15 billion in cash and stock. But Walgreen bowed to political pressure by abandoning plans to reincorporate overseas, a move that could have lowered its tax bill. Walgreen is rated B (average).
Continental Resources ($146; CLR) is being dropped from the Long-Term Buy List. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 8.1% of the list.