2023Q1 Earnings Review Part III: Energy

• Halliburton Company reported a solid quarter, and this is an opportunity to add a valuable oil service to your portfolio.
• Pioneer National Resources reported a mixed quarter with a solid outlook and share buyback.
• Enphase Energy’s stock sell-off is overdone on the news of US segment weakness because growth looks solid.

Halliburton Company (HAL)

HAL is a leading oilfield services and equipment provider in over 80 countries. HAL reported its first-quarter 2023 results on April 20, 2023, beating analysts’ expectations on revenue and earnings per share (EPS). HAL’s revenue for the quarter was $5.7 billion, up 33% year-over-year, driven by higher activity and pricing across all regions and product lines. The CEO said their service capacity is “tight” due to the high demand for oil & gas production in the Middle East and North America. HAL’s EPS for the quarter was $0.72 (beat WallStreet estimates by $0.05), reflecting improved margins and operational efficiency. The reported EPS number did not exceed our fund estimate of $0.73, as we expected higher profits.

HAL’s operating income for the quarter was $975 million, with an operating margin of 17.1%, up 521 basis points year-over-year. HAL had a cash burn of $146 million during the quarter, up 39% year-over-year, and ended the quarter with $1.88 billion in cash & cash equivalents. HAL returned $193 million to shareholders through dividends and share repurchases for the quarter, representing a payout ratio of 48% of free cash flow. HAL’s outlook for the second quarter and the full year 2023 is positive, as it expects to benefit from the recovery in global oil demand and supply and its differentiated technology and service offerings. The stock sold off after the earnings report, but it was more of a sell-a-news event for investors. We think this is an opportunity to add to a company that will benefit from the structural demand for oil & gas. We have taken advantage of the selloff in oil-related names to add to Halliburton, which trades 13 times earnings with a 2% plus dividend yield.

Pioneer Natural Resources Company

Pioneer Natural Resources Company (PXD) is an oil and gas development company that operates in the Permian Basin of Texas and New Mexico. PXD reported its first-quarter 2023 earnings on April 27, 2023, missing the consensus estimate of $5.35 per share by $0.14, with earnings per share (EPS) of $5.21. This came ahead of our fund estimate of $4.85 per share because we expected a lower EPS due to the price deterioration of natural gas. However, PXD’s revenue for the quarter was $4.54 billion, missing the consensus estimate of $5.06 billion by $519.6 million and declining by 26.4% from the year-ago quarter’s revenue of $6.17 billion.
The lower revenue was mainly due to lower realizations of commodity prices, as the average realized price per barrel of oil equivalent (BOE) was $51.69, down from $68.48 a year ago. The average realized crude price per barrel was $75.15, down from $94.60 in the first quarter of 2022. Despite the lower revenue, PXD’s production increased by 6.7% from the year-ago quarter, reaching 680.4 thousand BOE per day (MBoe/d), with oil accounting for 53.1% of the total production. PXD also announced a dividend payment of $3.34 per share of common stock for the first quarter, which includes a variable dividend of $2.09 per share and a base dividend of $1.25 per share. This represents a 40% decrease from the last paid-out dividend of $5.58 per share, reflecting the company’s prudent capital allocation strategy amid volatile market conditions.
PXD also authorized a new $4-billion share repurchase program, replacing the existing common stock repurchase program, to enhance shareholder value and return excess cash flow to investors. For the upcoming second quarter of 2023, PXD expects to produce between 685 MBoe/d and 705 MBoe/d, with oil comprising 52% and 54% of the total production. For 2023, PXD expects to produce between 685 MBoe/d and 715 MBoe/d, with oil comprising 52% and 54% of the total production. PXD also expects to generate a free cash flow of $3 billion to $3.5 billion for 2023, assuming an average WTI oil price of $65 per barrel and an average Henry Hub natural gas price of $2.75 per thousand cubic feet (Mcf).

This was a mixed quarter from PXD, and it was treated as such as the stock sold off on the news. We took advantage of the sell-off to add to our stock position because PXD will gain from the Biden administration's refilling of the strategic petroleum reserve. The refilling is currently on pause because the Biden administration does not have enough funds in Treasury to initiate the oil buying to refill the strategic petroleum reserves as they wait for the debt ceiling to be raised by Congress. We think the oil price has a floor between $65–75/barrel as the Biden administration looks to refill the strategic petroleum reserve.

Enphase Energy, Inc.

Enphase Energy Inc. (ENPH) is a leading provider of solar energy solutions and smart grid technology. The company reported strong Q1 2023 results, beating analysts’ expectations on both revenue and earnings. Revenue grew 64.5% year-over-year to $726 million (beat WallStreet estimates by $5.5 million), driven by higher demand for its microinverters and energy management systems. Earnings per share increased to $1.37 (beat WallStreet estimates by $0.15), reflecting improved gross margin and operating leverage. ENPH’s headline numbers seem to have come in ahead of our expectations of earnings per share of $1.34 per share on revenue of $726 million.

ENPH’s gross margins expanded by over 490 basis points to 45%, while operating margins expanded by 1.4% to 23.1%. The US segment did show some signs of slowing, maybe a sign of the tightening monetary environment. ENPH generated $223.8 million in free cash flow, up from $90.1 million. The company gave solid Q2 2023 guidance, expecting revenue of $700–750 million and a gross margin between 41% and 44%. ENPH has a competitive advantage in the solar industry with its innovative products, loyal customer base, and global presence. The company faces challenges, such as supply chain disruptions, regulatory uncertainties, and increasing competition.
However, ENPH is well-positioned to capitalize on the growing adoption of renewable energy and smart grid solutions in the long term. The company has a healthy cash balance of $1.78 billion which it can use to improve its supply chain or make a strategic tuck-in acquisition to widen its economic moat. The stock plunged 15% on the news of some weakness in the US segment, and we see this as a long-term secular growth play in the transition to green & cleaner energy sources. We have been averaging down our stock position and adding during the stock selloff.

Disclosure: Cresco Investments is long Halliburton (HAL), Pioneer National Resources Company (PXD), and Enphase Energy Inc. (ENPH).

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 consult with their financial advisor(s).