This strength in the deepwater has helped to offset onshore weakness for the group. Schlumberger Limited. (NYSE:SLB) echoed this on its call by saying that “continued weakening of North America land margins was more than offset by strong activity and excellent performance in the Gulf of Mexico, where deepwater drilling activity reached pre-Macondo levels, as expected.” Investors in general are completely missing this fact and under-pricing the sector.
Trouble in the Great White North
While producers in the Bakken and deepwater have reason to celebrate, those operating in Canada need to proceed with caution. Listen in to what Martin Craighead, the CEO of Baker Hughes Incorporated (NYSE:BHI) , has to say:
Many of our customers continue to deal with constrained cash flows from low natural gas prices and an abundance of projects that are marginally profitable. Our U.S. shale oil production, coupled with decreasing consumption and limited refining and pipeline capacity, is increasing differentials for heavy oil close to $40 a barrel. Considering that break-even prices for new heavy oil projects can be as high as $65 a barrel, we believe that some of these projects in Canada are at near-term risk. Given this, Canadian customers are focused squarely on conserving cash and increasing returns on capital. And until industry fundamentals change — and the biggest driver to that is improvement and takeaway capacity — Canadian activity will remain challenged.
Producers in the region will continue to suffer until pipeline and rail capacity catches up to production. This is where rail operator Canadian National Railway (NYSE:CNI) can really step in and make a difference. The company is planning to double its crude-by-rail business over the next year. One of the big moves the company is making is building a new terminal in the Gulf Coast so that Canadian producers can access that market and not hit the current bottlenecks at the Cushing, Okla., storage depot.
The key takeaway for investors
The energy industry is alive and growing. Unfortunately, it won’t always be a smooth ride. That’s actually good news for investors because you can get some pretty great bargains as others miss the turn. Listen to what these smart management teams are telling you so you don’t miss the opportunities to profit from the growth while sidestepping the pitfalls.
The article 3 Can’t-Miss Quotes for Energy Investors This Earnings Season originally appeared on Fool.com and is written by Matt DiLallo.
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway and National Oilwell Varco. Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
