The third-quarter earnings season for oil and gas companies has been tough. Upside surprises have been few, and “misses” have been punished—often harshly. If there is a silver lining here and there, you have to stretch to see it.

Chris Sheehan

One of the earlier to release numbers, Newfield Exploration Co., based in Houston, reported some impressive results from several developing plays: a Hogshooter well with a 30-day initial production (IP) rate of 4,200 barrels of oil equivalent (BOE) per day; its first two horizontal Wasatch wells in the Uinta Basin, with an average IP of 1,200 BOE per day; and an extended lateral well on its North Cana acreage with an IP of 925 BOE per day (93% oil).

But what spooked investors were New-field’s conference call comments signaling that international volumes could be down a steeper-than-expected 25% in 2013, catching the market off guard.

How tough is this market on a negative surprise like this? Newfield’s stock ended the day down 17.6%.

On the same day, capital equipment supplier FMC Technologies Inc., on the oilfield service side, also had its quarterly call. While numbers in its key Subsea Technologies division also came in light, the call zeroed in on its North American-focused Surface Technologies division. Analysts had taken down revenue and margin assumptions along with the slowing U.S. rig count—but not deeply enough—particularly for its fluid control product line.

Bottom line? An 8% selloff in the stock.

That’s the way the market has treated misses, with recent thin trading volumes and uncertainty over the “fiscal cliff” exacerbating any faltering in fundamentals. Stocks are tagged as being “dead money” or being in the “penalty box,” with correspondingly lowered expectations.

But outperformers have emerged from stocks with earlier lowered expectations.

SM Energy Co., based in Denver, confirmed a switch from laggard to outperformer with a 10.8% jump in its stock price on release of its third-quarter earnings. Prior to the announcement, its year-to-date stock performance was negative 26% (versus -6% for the EPX). Critical to turning around its performance was its progress in the latest quarter in resolving infrastructure issues that had been a drag on its Eagle Ford production. It also raised full-year production guidance slightly (+1.6%).

Also guiding to slightly higher full-year production was Anadarko Petroleum Corp. Long recognized for its fundamentals, domestically and internationally, the Houston-based company’s stock has yet to resolve the cloud of its Tronox litigation, which has contributed to a year-to-date negative performance of -13% as of its earnings release (versus -6% for the EPX). The relative underperformance is despite significant drillbit success internationally.

Where else can progress pierce through the gloom? Domestically, Anadarko and SM Energy both operate in the Eagle Ford, and both are at pains to improve drilling efficiency in the basin. From a 30- to 40-day starting point for the industry early in the play, SM Energy says it has drilled a well in its Galvan Ranch area in less than 13 days. Anadarko says it achieved a spud-to-rig-release time of less than 10 days for 28 of its wells in the quarter (it spudded 76 and completed 56 wells).

A third player, Plains Exploration & Production, has said it set a company record by drilling a well in 11 days.

These may seem incremental steps against a much larger picture of commodity swings and economic uncertainty. However, costs are one factor that operators can strive to control, and the Eagle Ford play is still in its early stages. According to Becca Followill, senior managing director, U.S. Capital Advisors, E&P companies are in only the second inning of Eagle Ford development, with the current well count expected to surge from 3,000 currently to as many as 20,000 wells by 2018.

Studies by ITG Investment Research indicate that the Eagle Ford—which it separates into eight play components or windows—is already among the most economic in the U.S. The East gas-condensate window and East oil window break even (assuming a 10% pre-tax rate of return and 25:1 gas-to-oil ratio) at West Texas Intermediate prices as low as $44 and $50 per barrel, respectively. Overall breakeven, including dry-gas windows, is put at $65.

In what ultimately is a worldwide commodity market, steps in the right direction—even amid the gloom—add up. As one industry observer says, “The U.S. is at least five to 10 years ahead of other markets in terms of resource play development.”

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