Analysis: For energy companies 2012 likely to be fraught with pricing peril

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Analysis: For energy companies 2012 likely to be fraught with pricing peril

Reuters | May 15, 2012 | 03:40 PM EDT

(Reuters) - Just six months ago energy companies were the kings of the hill, delivering stronger results than any other market sector, but 2012 is looking very different, if first-quarter results are signs of future fortune.

Part of the reason was the drop in natural gas prices to lows not seen in a decade. Half the companies in the sector missed Wall Street's estimates for the first quarter, a blow analysts did not see coming.

Balance-sheet weakness could be in store in coming quarters if prices remain under pressure.

Furthermore, energy companies have been spending heavily on capital projects, and their return on investment could be hurt by slowed global growth.

"The bias is still down. Earnings expectations for most of the energy sector are still too high," said Laton Spahr, who manages Columbia Management's Dividend Opportunity Fund in Minneapolis, with $18 billion in assets.

"The overhang we have in excess natural gas most likely gets worse as the summer goes on. That is going to keep natural gas prices relatively low. It's going to force some capacity to be reduced," Spahr said.

Weak demand looks set to hurt the energy sector. Second-quarter earnings are expected to fall 11.3 percent from one year ago, more than the 6.6 percent fall forecast by Thomson Reuters on April 1. Third-quarter earnings are seen down 9.1 percent, more than the 6.1 percent decline estimated previously by Thomson Reuters.

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