Southwestern Energy (SWN)

Southwestern Energy Co's quarterly profit rose 187 percent, beating Wall Street expectations, helped by an increase in production and higher realized natural gas prices.

The company raised its 2008 natural gas and oil production outlook.

For the second quarter, the company reported net income of $136.6 million, or 39 cents a share, compared with $47.6 million, or 14 cents a share, a year ago.

Analysts on average were expecting earnings of 37 cents a share, before items, according to Reuters Estimates.

Gas and oil production rose to 45.1 billion cubic feet of natural gas equivalent (Bcfe) from 25.8 Bcfe in the year-ago quarter.

Operating revenue more than doubled to $604.4 million, while gas sales doubled to $368.9 million.

Southwestern's average realized gas price was $8.17 per thousand cubic feet (Mcf), including the effect of hedges, up from $6.90 per Mcf in the same quarter last year.

Average realized oil price was $122.26 per barrel, compared with $61.72 per barrel in the year-ago quarter.

The company raised its 2008 natural gas and oil production outlook to a range of 181.0 to 185.0 Bcfe, from 168.0 to 172.0 Bcfe.

Flowserve (FLS)

Flowserve (FLS), maker of industrial pumps and fluid handling equipment, trounced earnings estimates by 64 cents. Sales grew 24% to $1.16 billion. The company reported huge demand in its project infrastructure unit, which serves the oil and gas, power, chemical, and water markets.

Management sees its 2008 earnings now in a range of $7.20 to $7.50 a share, up from its previous forecast of $5.90 to $6.20 a share. For dividend investors, the company’s .74% dividend yield (based on last night’s closing stock price of $135.0) is not super attractive, but the all-important PEG (Price to Earnings Growth) is less than 1. This low PEG number indicates great growth and a low valuation, making Flowserve a name to pick up on pullbacks…as long as management keeps this type of execution up.

The market continues to not reward these global growth companies for stellar earnings. As I wrote this AM, Flowserve (FLS) posted some fantastic earnings and a huge guide up on 2008 estimates [Flowserve Mighty Impressive Earnings]

After gapping up to the mid $140s, the stock is back down to $137s... to completely fill the gap it would need to go down to $135, but I'm willing to put a stake in the ground here. Beginning with a 1.3% position and willing to build on pullbacks. $115-$120 would be a nice area as this is where the stock has bottomed twice in the past month. Considering they just raised 2008 estimates by $1.25 it wouldn't make much sense to see such a fall, but what has been making sense of late. Throw a conservative 15 P/E ratio (for 100% earnings growth) on this extra $1.25 of 2008 earnings and you have +$20 in stock price. Instead we get +$3. I guess "it's all priced in"

EDIT 12:15 PM - that didn't take long. The bear market sneered at us for daring to buy anything. Already down to $130. So the gap is now fully filled and the stock is right back at its 50 day moving average. Folks buying in the mid $140s this morning are already enjoying a quick trip to the house of pain. Off in the distance a bear could be heard laughing. I'll take it up to 1.6% stake here with another smaller purchase. Next addition will be down in $115-$120 range. Which might be in a few hours. Just imagine if they had dared to miss ;) Let me guess - oil is down $3 so every stock that was loved yesterday when oil was up $3 must now be sold. Got it.

weakness in the global infrastructure names is mind boggling to me - Fluor (FLR), Jacobs Engineering (JEC), and Foster Wheeler (FWLT) are acting as if the world will end as oil falls to $120 (or $100). If you read the press releases on the type of contracts these names are putting out on a weekly basis it's an embarrassment of riches (wind, gas, petroleum, solar - they're everywhere), but the hedge fund computers prefer banks I suppose.

Flowserve is not the exact same type of company but off the same theme - yes the globe will slow but those with money (petrodollars and huge trade surplus) will continue their advancement. [Jul 12: Where is your Gas Money Going?] [Feb 27: $2 Trillion of Petrodollars Needs a Home this Year] We'll continue to purchase companies out performing in this period of market madness. But we won't make large purchases until the market acts rational and technicals improve.

Flowserve Corporation develops, manufactures, and sells precision-engineered flow control equipment, as well as provides a range of aftermarket equipment services. It operates in three divisions: Flowserve Pump, Flow Control, and Flow Solutions.

1. The Flowserve Pump division offers engineered and industrial pumps and pump systems; submersible motors; replacement parts; and related equipment primarily to industrial markets. Its products include centrifugal pumps, positive displacement pumps, and specialty products and systems, such as hydraulic decoking systems, reactor recycle systems, and cryogenic liquid expanders.
   
2. The Flow Control division designs, manufactures, and distributes industrial valve products, including actuators and accessories, control and ball valves, lubricated plug valves, condensate and energy recovery systems, pneumatic and electro pneumatic positioners, smart valves, steam traps, manual quarter-turn valves, valve automation systems, valve/actuator software, nuclear valves, and quarter-turn actuators.
   
3. The Flow Solutions division offers mechanical seals, sealing systems, and parts principally to process industries. Its products include cartridge seals, dry-running seals, metal bellow seals, elastomeric seals, slurry seals, split seals, gas barrier seals, couplings, and accessories and support systems.

Oil service groups enjoy ‘boom time’

By Sheila McNulty in Houston

Published: July 20 2008 20:01 | Last updated: July 20 2008 20:01

The big winners of high oil prices are not the international oil companies being criticised by politicians for their enormous profits, but rather the oil services companies that the majors rely on for equipment and labour.

Wood Mackenzie, the energy consultants, say that over the past three years, large oil service company revenues have on average tripled, with net margins rising even higher, outperforming the far better known majors, ranging from ExxonMobil to BP.

And analysts expect this to be another solid year for companies such as Schlumberger, Baker Hughes and Transocean, given the rush to develop oil and gas assets amid record energy prices. Quarterly results are supporting that analysis.

On Friday, industry leader Schlumberger reported revenues of $6.75bn for the second quarter, up from $6.29bn in the previous quarter and $5.64bn in the second quarter of 2007. Other results are scheduled to trickle out over the next few weeks.

“There is a huge demand for equipment and services and many areas are pretty much at maximum capacity,” says Colin Lothian, senior cost analyst at Wood Mackenzie. That has enabled the industry to push up prices. The surge in demand for oilfield services started with the rise in oil and natural gas prices several years ago and the string of record energy prices in recent months looks set to increase this demand still further.

“Certainly this is a services sector boom time,’’ says Mr Lothian. But he notes that the service companies are also experiencing a substantial rise in base costs, which is affecting margins.

Barclays Capital says in a recent report that offshore drillers remain the most lucrative nook in the services arena.

It notes that 120 new jack-up and semi-submersible rigs are reported to be on order, with about 40 scheduled for delivery in 2008, which may affect the balance between supply and demand.

Yet even if more supply comes on line, signs are that demand will continue to grow. Barclays says the tide in North American land drilling weakness has begun to turn, with several companies stating activity will improve because of the run-up in natural gas prices.

Natural gas still represents about 80 per cent of US drilling activity and all signs are that that activity will continue to grow.

Barclays says the active natural gas rig count rose to 1,530 in the last week of June, the highest since gas-specific record-keeping began in 1987.

Yet analysts say the oilfield services companies poised for the biggest profits are those with an international presence, given that the national oil companies that control more than 80 per cent of the world’s oil reserves have begun shutting out the middleman – the big international oil companies – to do some oil and gas development themselves. However, they still need the equipment and talent held by the services sector and are hiring them directly.

Barclays says that oilfield services are “at a premium”, with international opportunities driving growth. Schlumberger, which it calls the “giant of oilfield services”, has products covering the gamut of oilfield services, and is diversified, with North America accounting for only 22 per cent of its total operating income.

Barclays notes that Halliburton, the other giant in the sector, is shifting its relatively high exposure to North America to international markets, having relocated its corporate offices to Dubai in 2007.

Of the contract drillers, Barclays says that Trans-ocean has less than 12 per cent of its rig fleet in the US and that Noble is also internationally diversified, with only nine of its 62 rigs situated in the US Gulf of Mexico.

“Demand for oilfield services continues to accelerate in both established and new geographic markets,” says Robin Shoemaker in Citi Investment Research’s latest report on the sector. “We believe that the industry upturn is still in its early to middle stages.”

Citi has “buy” ratings on Schlumberger, Halliburton, Cameron International and National Oilwell Varco, whose earnings growth it expects to be above-average because of innovative technologies, focused acquisition strategies and targeted expansion into new geographic markets.

Citi notes that the Oil Services Index rose 267 per cent from January 1 2004 until June 20 2008, while the S&P 500 advanced by only 19 per cent.

“A spotlight has been shining on the oil services stocks for four and a half years, and some investors are wondering if the attention continues to be warranted,” Citi says in its report. “Our view is that as investors see more evidence of strong market conditions through 2010 and beyond, they will conclude that the shares of many oil services companies are undervalued.”

CPM says global molybdenum supply deficits will grow in 2009 and 2010

In its latest molybdenum market study, CPM says tight credit market s and other developments have caused molybdenum’s forward supply curve to shift over the past year. Author: Dorothy Kosich
Posted: Thursday , 10 Jul 2008

RENO, NV -

Commodities research firm CPM Group says financing for molybdenum mining projects "has become an uphill battle for some of the new primary and by-product producers."

Meanwhile, the delays in bring new primary moly or copper/moly mining projects on line have exacerbated the moly supply deficits forecast for 2009 and 2010, according to CPM's study, The Sustainability of Recent Molybdenum Prices, 2008.

The report asserts that supply deficits are expected to be larger over the next two years, followed by slightly larger surpluses from 2011 through 2014.

Meanwhile, CPM says the price outlook for molybdenum going forward "has become moderately more bullish than previously projected. The upward revision in the expected prices for molybdenum is partially supported by climbing capital expenditures, the sharp increase in diesel prices, higher electricity prices in China, and loftier freight charges."

"These higher production costs-combined with robust demand in the energy industry, narrow inventory levels, and expectations that molybdenum supplies will not exceed demand on a sustained basis are expected to boost the floor prices of molybdenum," according to a news release issued by CPM Wednesday.

"The deeper deficit in 2008 and 2010 should help underpin molybdenum prices at higher levels over that period. However, prices are expected to decline in 2011 as the market transitions back into a surplus," the news release said. "Demand for molybdenum, during the recovery in global economic growth, may be amplified by molybdenum's price correction. "

In the release, CPM noted that moly demand has increased at a "robust rate" over the past five years.

"Demand is not only growing in the principal end uses of molybdenum, but in newer industries that are seeking to utilize molybdenum's significant alloying properties," according to CPM.

Three common investment mistakes

If you are fortunate enough to have the money to invest in stocks, you may have made some money doing so. But you may also have made your share of money-losing investment mistakes. I know I have made plenty of such mistakes. Based on my experience, here are three that I would guess are pretty common:

• Not reading the prospectus. Too many investors buy stocks on tips from a broker or a TV stock promoter. They do not read the financial statements of a company. If they did, they would know about financial challenges, legal problems, industry uncertainties and other problems which could hammer their investments. But people don't read these financial statements, in many cases because they lack the financial education to make sense of the information.
• Not setting stop losses. People fall in love with a stock once they've invested. If the stock goes down, they hold on because they don't want to admit that they were wrong. Investors should set stop losses – if the stock falls 2% to 5% from the original price, they should sell. Most investors do not have the discipline to do this. But if they did, they would limit their portfolio risk tremendously. Would they also miss out on some opportunities? Probably, but more often than not, they'd save themselves losses.

• Confirmation bias. Decision-makers often tend to lap up information that reinforces their view of the world and ignore information that undermines that view.This so-called confirmation bias plays out in investor's portfolios every day. That's because if an investor buys a stock, he or she tends to look for information that makes them believe the stock will rise. Investors filter out any negative information. What they should do is ask an objective analyst to weigh all the pro's and con's and make a recommendation about what to do. But thanks to confirmation bias, most investors would ignore such advice anyway.

Cleveland-Cliffs' run shows no signs of slowing

Deutsche Bank increases their price target on Cleveland-Cliffs (NYSE: CLF) from $115 to $150 and reiterates their Buy rating. The firm increases their 2008 EPS estimates from $5.77 to $6.69 and 2009 EPS estimates from $9.57 to $12.52.

The firm said, "Our expectations for Cliffs realization prices were upped for both iron ore and coal. Our previous estimates for 2008 were based on a 65% increase for fines in Asia Pacific which has already been superseded by the announcement of the ~80% increase reached by Rio Tinto with Chinese steelmakers. For 2009, main changes stem from DB's revised commodities forecasts, which now call for a 5% increase for pellets (vs. 0% previously), +20% for fines (vs. previous +10%), and higher realization prices given a ~US$230/mton price assumption for standard hard coking coal. These new benchmarks imply realization prices at around US$99/lton for NA pellets, ~US$154/ston for NA coal, and ~US$113/mton for AP fines."

Year founded: 1847
Business: Iron ore and metallurgical coal
Headquarters: Downtown Cleveland
2007 revenue: $2.28 billion
Employees: 5,300 worldwide; 150 in Cleveland.
Locations: Mines in United States, Canada, Australia and Brazil.
Cleveland-Cliffs Inc. has seen its stock price rise more than 300 percent since the beginning of 2007.

But that's nothing.

If you go back to January 2001 -- the height of the steel crisis -- Cliffs' stock price has gone up some 5,000 percent, from about $2 a share to more than $100 today.

That means a $20,000 investment then is worth $1 million now.

And get this. The stock might not have peaked.

Global growth, especially in China, and a weak U.S. dollar have been the drivers, pushing up demand for steel made here and abroad. Cliffs mines in Michigan, Minnesota and Canada supply blast furnaces across North America with iron ore, the main ingredient in making steel, while their mines in Australia ship to China and Japan.

Cliffs recent foray into metallurgical coal is expected to pay off in a big way, too.

The company, one of the oldest in Cleveland, has come a long way from the dark days earlier this decade. It has made all the right moves, beginning with a decision to expand its iron ore reserves in North America at a time when bankrupt steel companies were looking to unload them.

Adding reserves at bargain prices proved brilliant, as Cleveland-Cliffs had more iron ore to sell once the steel industry consolidated and surged back to life.

The company's then chief executive John Brinzo didn't stop there. In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.

But Brinzo held his ground. The deal went through. Since then, Portman's stock has increased about 400 percent.

Cleveland-Cliffs CEO Joseph Carrabba
Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal.

Metallurgical coal, as opposed to the thermal variety burned to make electricity, is converted into coke. It's then mixed with iron ore in a blast furnace to produce molten iron, the first step in the steel making process at mills like the one owned by ArcelorMittal along the Cuyahoga River in Cleveland.

Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama. The investment has fueled the continued rise of Cliffs' stock price, said Mark Liinamaa, an analyst with Morgan Stanley & Co., with coal revenue expected to rise substantially after current contracts expire.

Carrabba said he expects coal contracts that now pay an average of $94 per ton to renew for at least $250 per ton when they start to expire at the end of this year in the United States and next April for European customers. About 60 percent of Cliffs' coal is exported, with much of it going to ArcelorMittal plants in Europe.

"I would say over the last four or five years there really isn't anything they've done wrong," said David MacGregor, analyst with Longbow Research in Independence.

Among those investors along for the ride is New York hedge fund Harbinger Capital Partners, which has steadily added to its stake in the company in recent months. It owned more than 17 percent of Cliffs' common shares -- valued at more than $1.6 billion at Wednesday's closing price of $105.50 a share.

Harbinger senior managing director Philip Falcone did not return a call seeking comment, but his investment group has shown broad interest in the metals industry. It owns a stake in Fortescue Metals Group, a start-up iron ore company in Australia, and at last count was the largest shareholder of U.S. steelmaker AK Steel, based near Cincinnati.

While Harbinger likes Cliffs' business fundamentals, it's also thinking the company could be a takeover target at a premium price, MacGregor said. Among those fueling takeover speculation is Jim Cramer, the bombastic host of CNBC's "Mad Money" stock-picking television show. He often touts Cliffs on his show.

Harbinger has played both active and passive roles with investments. For example, it forced the sale of steel processor Ryerson Inc., while Carraba said Harbinger has been strictly passive in its dealings with him.

Among those speculated to be interested in Cliffs is steel giant ArcelorMittal. It's already Cliffs' largest customer, commanding 44 percent of its North American iron ore sales.

Carrabba would not comment on any possible suitors, but said if an offer is made, it's the company's duty to consider it. Currently, mining giant BHP Billiton Ltd. is looking to take over rival Rio Tinto Ltd.

For his part, Carrabba expects the good times to continue. He does not believe iron ore is trading in a bubble like some think is the case with oil and other commodities. Unlike oil, iron ore is not traded on a commodities exchange and elicits little speculation from investors, he said.

Also, while previous surges in iron ore prices have led to substantial increases in supply, that's not happening this time around, he said.