(Acuity Knowledge Partners)
- Halliburton reported a strong quarter as oil production continued to grow at a steady pace.
- Pioneer Resources reported a mixed quarter but the company’s Q4 outlook makes up for a subdued quarter.
- Brookfield Renewable Energy Partners reported a top and bottom line beat and the company continues to grow its asset base.
- Algonquin Power & Utilities Corp reported a mixed quarter but the guidance for 2022 caught investors by surprise.
The energy and utility sectors had a modest showing during the Q3 earnings season as they either beat or reported a mixed quarter. In general, the industries did not miss analyst estimates by a wide margin. The energy stocks look strong going into 2023 despite economic headwinds on the horizon because there will be demand due to the structural problems in Europe. Utility companies will be looking to capitalize on the tax credits from the Inflation Reduction Act to grow their renewable energy assets as the world pivots towards green energy. The stocks that our fund holds in the energy and utility sectors include Halliburton (HAL), Pioneer Natural Resources (PXD), Brookfield Renewable Energy Partners (BEP), and Algonquin Power & Utilities Corp (AQN).
Halliburton (HAL): The oil services company reported a top and bottom line as it reported earnings of $0.60/share (beat WallStreet estimates by $0.04) on revenue of $5.36 billion (beat WallStreet estimates by $20 million). In comparison to our estimates, Halliburton’s quarter came in line with our expectations of earnings of $0.59/share on revenue of $5.36 billion. The revenue beat was led by the Completion & Production segment which had a revenue growth number of 8% while the Drilling & Evaluation segment has modest revenue growth of 3%. The company reported 39% year-over-year growth in its overall revenue. Europe was the weakest geographic region with revenue down 11%
Operating margins were up 16% as management executes its cost discipline strategy. Cash flow from operating activities came in at $753 million. Management used the good earnings to repair its balance sheet as they redeemed $600 million of its debt earlier than expected. The company was finally able to sell off its Russian operations to a consortium of its former employees. Looking at free cash flow it came in at $543 million but the net cash for the company was down $249 million because of the early debt payment. Halliburton is in the sweet spot of the oil & gas industry at the moment and will continue to benefit from the renaissance going into 2023.
Pioneer Natural Resources (PXD): The oil & gas exploration company reported a mixed quarter with earnings of $7.48/share (beat Wallstreet estimates by $0.21) on revenue of $6.1 billion (missed WallStreet estimates by $332 million). Pioneer Natural Resources beat our earnings estimate but missed our revenue estimate as we expected the company to have higher production numbers. We estimated the company would earn $7.45/share on $6.5 billion of revenue. Pioneer reported revenue growth of 36.5% all thanks to higher oil and natural gas prices during the quarter.
Production numbers for oil and gas were slightly lower compared to a year ago. It seems like management is trying to stay disciplined in this high inflationary environment as they also contend with labor shortages as well Management is also extra capital savings from its oil & gas assets in the resource-rich Permian Basin. The company is not pulling back on its capital expenditure as the plan wants to spend up to $4 billion on capital projects going into 2023. Management gave strong fourth-quarter guidance on production and expense controls seem to be intact to round out 2022. Pioneer Natural Resources remains our favorite energy play that is very undervalued and we will be looking to add to our stock position on any weakness.
Brookfield Renewable Energy Partners (BEP): The renewable asset owner and utility partnership reported funds from operations of $0.38/share (beat Wallstreet estimates by $0.02) and revenue of $1.11 billion (beat WallStreet estimates by $50 million). In comparison to our fund estimates, Brookfield beat our expectations as we estimated the partnership would generate funds from operations of $0.35/share and revenue of $1.1 billion. The partnership reported revenue growth of 15% and fund-from-operations growth of 15% as well. The partnership closed up to $6 billion worth of capital deals for renewable assets during the quarter. The company is on track to deliver up to 2,600 gigawatt hours of clean energy annually. For context 1 gigawatt-hour lights ups 185,000 homes a year.
The company is a beneficiary of the Inflation Reduction Act passed by Congress this year. The bill comprises various tax credits related to investing in renewable energy. Looking at the segments, the Hydroelectric, and Wind & Solar assets produced $130 million and $147 million in funds from operations during the quarter. The balance sheet seems to be in good shape as the company received an S&P rating of BBB+ (an investment grade rating even after all the debt raising). Brookfield ended the quarter with $7.2 billion in liquidity on the balance sheet. Management declared a $0.32/share dividend for shareholders as they aim to raise the dividend by between 5–9% annually.
Overall, this was a solid quarter for Brookfield as it keeps growing at a steady pace. We will keep adding to our stock position and we will only cap our purchases when our position is 2.5% of the portfolio. The stock is in a defensive sector but is growing faster than its peers with a good yield of 4 plus percent.
Algonquin Power & Utilities Corp (AQN): The Canadian utility company missed on earnings but beat on revenue as it reported earnings of $0.11/share (missed WallStreet estimates by $0.05) and revenue of $666.7 million (beat WallStreet estimates by $71.94 million). In comparison to our estimates, Algonquin reported light earnings as we estimated the company would earn $0.19/share on revenue of $603 million. The company reported it had revenue growth of 26% and adjusted earnings before interest depreciation & taxes (EBITDA) came in at $276.1 million up 10% from a year ago.
However, the company had to contend with higher interest expenses & some tax timing delays on its tax credit offsets from favorable asset programs. Net earnings were $73.5 million for the utility company that is pivoting toward green energy. Its acquisition is set to close in 2023 and due to the asset devaluation due to higher interest rates, management was able to reduce its purchase price. Algonquin sold some of its renewable assets to balance its asset base for $360 million. In terms of guidance, it was very woeful from management as it cut its earnings by 10.4% to between $0.66–0.69/share. This could be due to higher interest rate costs or higher integration costs for its acquisition.
As a result of this drastic outlook, we exited our position in the stock as the stock tanked 20%. For a utility company to cut earnings like that makes it unreliable for a reliable and trusted sector. We will be looking to redeploy the capital to some other sectors in the portfolio.
Disclosure: Cresco Investments is long Halliburton (HAL), Pioneer Natural Resources (PXD), and Brookfield Renewable Energy Partners (BEP).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).
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