Interview: Analyst with Pickering Energy Partners
>> let’s pit the spotlight on energy with crude oil prices slumping today that. on heels of a report from the department of energy showing u.s. inventories rose last week. while today’s supply may be sufficient to meet demand, what about six months from now? here to offer his forecast is david purcell, analyst with pickering energy partners, joining us from houston, texas. david, want to start with asking you about the whipsaw we saw in the market today. we had the prices rise on the heels of the report from the department of energy but then ending the day with that slump. what do you make of that turn around?
>> hi, ellen. thanks for having me. the market was anticipating a large gasoline draw and you saw that. but the gasoline draw was not caused by reduction in refinery production. remember, there had been a lot of reported outages over the past couple of weeks of large refiners in the u.s. refinery production of gasoline was essentially flat from week to week. the reduction in inventories was really a function of reduced imports for the week. i think the market is anticipating those refineries coming back online and maybe not seeing as large of draws over the next couple of weeks. then gasoline season is over or peak driving season is over.
>> when you get to the office every day, do you have any sense what will happen, meaning how much is this market trading on fundamentals and how much is it trading on something else, fear or speculation?
>> i think the underlying fundamentals are driving the market higher. but on a day-to-day basis, it’s really hard to figure out what is moving the market higher. you saw today, gasoline traded up and then it traded down significantly after the numbers came out.
>> a lot of focus on the fact that we’re close to labor day, we’re getting close to the end of the peak summer driving season. do you think we have seen the peak in gas prices perhaps?
>> i think it’s hard to tell. i don’t mean to be―to have that kind of caveat but we have winner weather in front of us. there’s a lot of factors. i think one of the overarching factors that hit the energy complex today is questions about underlying demand growth. you saw wal-mart cautioned yesterday that high gasoline prices are having an impact on their sales. the underlying demand growth numbers we’re seeing are less than impressive. i think that’s starting to weigh on prices with crude oil in the mid to high 60’s and retail gasoline is over $2.
>> let’s tie it into what this means for stock investors. i know when you look at the landscape you think oil service stocks perhaps are a safer bet for investors compared with the explorers and producers. why is that?
>> in a market where commodity prices may be flat to trading down a little over the next six months, oil service stocks likely have better earnings power. the producing companies will be impacted somewhat by lower prices. so in that environment we tend to like the service industry in general over the e.n.p. stocks.
>> give as you name you like the most, have the best potential to appreciate further.
>> favorite names, we stick with the big caps. a little bit of a safety issue there. we like halliburton and then b.j. services and then he schlumberger.
>> why in that order?
>> in that order we like halliburton and schlumberger because they’re broad, diversified service companies and touch on all pieces of the business. they’ll benefit from continued strong underlying fundamentals. we like b.j. services because they have a focus on north american natural gas. that’s a company that the street has not liked a lot lately. we think the street is coming around to liking the company again. couple that with incredible underlying fundamentals and that’s a stock we like.
>> given what you said that we could see prices flat to down in terms of the actual commodity,’ prices start to come down, how much do you think that will spook investors given how much appreciation there has been in the stock names, meaning what is the risk for the stocks really to tumble?
>> in the initial phase of a price decline, it’s not good for the stocks. it’s hard for stocks to go up when energy prices decline. as soon as there is recognition that prices are not in a free fall and they’ll stop somewhere in the low 50’s, then the deman concerns go away. lower prices go, the less concerned i am that prices will impact underlying demand growth. then i can focus on stock fundamentals and less worry about demand and things that are very difficult to quantify and predict.
>> thank you for joining us. david pur serbgs ll of pickering energy partners. in our “chart of the day,” a closer look at inflation. is it up, level or decreasing? our editor-at-large tom keene will offer perspective straight ahead.
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welcome back to “after the bell.” i’m ellen braitman. 30 after the hour. let’s recan’t day on wall street. stocks rose after hewlett-packard reported earnings that beat analyst estimates. also as oil prices plunged by the most since april. hewlett-packard the last company in the dow jones industrial average to announce results for the second quarter. the dow ending the day up 37 points. crude oil falling almost $3 a barrel, again the biggest decline since april. the drop coming after a government report showed u.s. refiners have sufficient supplys to make gas for the final weeks of the summer. we’ll talk about energy in a few minutes’ time. a closer look at stocks. i have the s&p up less than 1% so far this year. a lot of people looking forward toward the end of the year. deborah kostroun has more now on what strategists are anticipating.
>> thanks a lot. the s&p 500, it’s up only .6%. dow down 2% this year. nasdaq down 1%. we did see those indexes higher for the year. now they’re a little lower. tobias lekovich at smith barney says he expects the s&p 500 to rally to 1,300 by the end of the year. that represents a 6.6% increase from the close. what we’re looking at, at least what he says, much of that gain will come in the third quarter because he says we’re starting to see where you could start to see that over the next several weeks because investors typically anticipate a fourth quarter rally or traditional fourth quarter rally. he says as a result we could see prepositioning. he expects to see a rally to begin in the next six to eight weeks. as for today, take a look at laggards in the s&p 500. you saw sunoco, valero, freeport-mcmoran and phelps dodge. crude oil was down. we saw unexpectedly large declines in gasoline supplies. that really didn’t help things out. it was the fact that u.s. refineries may have sufficient supplys to make gasoline. in fact, gasoline futures were down 4.7%, biggest fluctuation of any commodity today. so what we did see is a lot of the oil stocks sharply lower. also material stocks were lower as well. in addition to some of the material stocks, if you look at gold, the philadelphia gold and silver index was sharply lower, one of the worst individual performers today. gold falling by the most in six weeks. this was the commodity, that as the dollar rose to a two-week high against the euro. that increases the precious metals appeal as an alternative investment. so whao we did see is more people going to the dollar as opposed to gold stocks. take a look at beverly enterprises. this is a company that operates 345 nursing homes from california to virginia. they agreed to a leverage buyout by a newly-formed group for $1.63 billion in cash. that after rejecting an unsolicited group back in march. north america senior care, they’ll pay $12.85 for each of beverly’s outstanding shares. we did see beverly closing a little lower than that $12.80 purchase price. once again, what we did see in today’s session, a little lighter than average volume. so below average volume, something we typically see during the month of august. back to you.
>> with that, a closer look at economy. wholesale prices in the u.s. surged more than economists expected last month. the government saying producer prices rose 1% in july for the biggest gain in nine months. our brett gering joins with us more on the inflation data.
>> the latest data from the government is renewing inflation fears that some economists maintain it does not change the overall inflation picture. still, the headline number of 1% is the sharpest rise since last october and double the average estimate in a bloomberg survey of economists. the main driver, gasoline and other energy costs. excluding energy and food, the core index rose .4. that’s four times the forecast and the biggest jump since january.
>> it confirm as trend we have been in for a while. that is inflation is going higher. the fed back in 2003 was concerned about deflation and wanted to put a little bit of inflation back into the economy. well, we’re getting it today.
>> energy prices jumped 4.4% last month after climbing 2% in june. gasoline alone rose 10.9%, the most since october. costs from the health care sector rose as well. prices paid to drug makers jumped 1.3% in july. that was the biggest increase since april of last year. perhaps the biggest surprise, passenger car prices rose 1.5% in july, the biggest rise since march 2003 following a decline of 1% in june. the cost of light trucks increased 1.4%. with the employee discounts offered by g.m. and other car makers, some economists question those numbers. as a result they say the p.p.i. report may not be telling the whole inflation story.
>> when you think through it, you look at the components and really outside of automotive, sweu hard to believe, and outside of floor kofrgs and pharmaceuticals, there’s not a lot of evidence that the energy side is soaking through in a broad-based pricing power.
>> economists say the p.p.i. combined with yesterday’s c.p.i. numbers should reinforce the view that inflation pressures have not peaked. as a result there is no reason for the central bank at sth point to abandon the measured pace of interest rate increases.
>> thanks so much. as brett was saying, energy a part of the inflation story. a lot of investors and traders asking will that slide continue or can energy prices head higher still? coming up, we put that question to david purcell with pickering energy partners.
