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WTR Energy Universe: 2Q26 Earnings Season in Focus · WTR Small-Cap Spotlight

• 0:01
  SPEAKER_00: Welcome to the WTR Small Cap Spotlight Podcast.
• 0:04
  SPEAKER_00: I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research.
• 0:10
  SPEAKER_00: Today I'm joined by Jeff Robertson, Managing Director for Natural Resources of Water Tower Research, to discuss the upcoming second quarter earnings season in the all-important U.S.
• 0:21
  SPEAKER_00: energy sector.
• 0:22
  SPEAKER_00: Good morning, Jeff, and thanks for joining.
• 0:24
  SPEAKER_01: Thanks, Tim.
• 0:25
  SPEAKER_00: Glad to be here.
• 0:26
  SPEAKER_00: Jeff, I know earnings season for the U.S.
• 0:28
  SPEAKER_00: energy sector kicks into gear this week and will continue through the next two weeks.
• 0:33
  SPEAKER_00: A couple of large cap oil field service companies and gas-oriented ENPs reported numbers last week.
• 0:39
  SPEAKER_00: Before we jump into company specifics, recognizing that oil market volatility has returned with renewed military strikes in the Persian Gulf.
• 0:48
  SPEAKER_00: How do you think producers are dealing with volatility as they plan activities for the remainder of 2026 and begin their planning process for 2027?
• 0:57
  SPEAKER_01: I think it's important to remember that most of the CapEx plans for 2026 were really put together in late 25 and the early in the first quarter of this year, when the commodity price outlook for oil especially was pretty soft.
• 1:11
  SPEAKER_01: I think people expected that there would be supply-demand imbalances that would lead could lead oil prices lower in 2026 and into 2027.
• 1:20
  SPEAKER_01: And as a result, I think most companies planned their budgets based on an oil price in the low 60s.
• 1:28
  SPEAKER_01: Given the shape, oil prices have obviously been volatile since the February 27th or 28th initiation of strikes on Iran.
• 1:41
  SPEAKER_01: But within all that, the futures curve, at least the back end of the futures curve, has remained pretty subdued.
• 1:47
  SPEAKER_01: Oil prices in the curve went up to$100 a barrel for WTI, which averaged$92.56 in the second quarter compared to$63.68 in the year-ago quarter and$72.67 in the first quarter of 2026.
• 2:04
  SPEAKER_01: WTI quickly fell back to$70 a barrel as we saw in early July following the ceasefire MOU before climbing back above$90 a barrel as of last week on renewed strikes.
• 2:18
  SPEAKER_01: Over the weekend, the news that there would be another halt in strikes pushed oil prices down.
• 2:24
  SPEAKER_01: I think earlier this morning, oil prices were down about 6% from where they closed on Friday.
• 2:30
  SPEAKER_01: So WTI has dropped back into the low 80s.
• 2:33
  SPEAKER_01: So I think all of that volatility probably keeps companies sticking to the plans they laid out earlier this year.
• 2:39
  SPEAKER_01: And I don't think we'll see big increases in activity, significant increases in activity as we think about the rest of the year.
• 2:46
  SPEAKER_01: I think we've heard some companies through the year talk about adding a rig or two, but not too dramatic.
• 2:52
  SPEAKER_01: I think companies are essentially getting more done with the capital that they've already allocated to spend as they realize efficiency gains.
• 3:01
  SPEAKER_01: For example, I think the rig count, the U.S.
• 3:04
  SPEAKER_01: rig count was 587 on July 24, and that included 450 rigs that were drilling for oil, and the frack spread count in the U.S.
• 3:13
  SPEAKER_01: was 198.
• 3:14
  SPEAKER_01: For comparison, before the war with Iran started, 550 rigs were working in the U.S.
• 3:20
  SPEAKER_01: with 407 drilling for oil.
• 3:23
  SPEAKER_01: So the rig count's up some.
• 3:25
  SPEAKER_01: It obviously doesn't really reflect the increase in the price of oil or the sustainability of it.
• 3:32
  SPEAKER_01: So I think that's that's probably what we'll hear people talk about over the back half of this year is that capital plans that were put in place early are still intact.
• 3:42
  SPEAKER_00: Great.
• 3:43
  SPEAKER_00: Were there any common themes from the earnings reports last week?
• 3:45
  SPEAKER_00: And what themes do you expect to dominate during the calls in the days ahead?
• 3:50
  SPEAKER_01: Last week we heard from Halliburton and Slumberger or SLB.
• 3:55
  SPEAKER_01: I think both of those companies talked about a kind of a multi-year view that activity for oil and gas development would increase, especially internationally, with a rebound starting in North America from where the uh where activity was earlier this year.
• 4:11
  SPEAKER_01: Mideast activity, I think, is picking up despite the on-again-off-again uh strikes with Iran and the issues around the Strait of Hormuz.
• 4:20
  SPEAKER_01: Companies are, I think they both indicated that countries over there who have had production disruptions are eager to restore production once conditions permit.
• 4:30
  SPEAKER_01: So I think that there's still a multi-year long-term growth strategy or a visibility in the Middle East that'll play out.
• 4:37
  SPEAKER_01: For Slumberger in particular, they emphasize growth in their data center solutions businesses, where I think revenue increased 30% sequentially and 80% year over year is one of their bright spots.
• 4:48
  SPEAKER_01: On the producer side, we heard from Range and EQT, both of which are Appalachian Basin focused gas producers in the Marcellus.
• 4:56
  SPEAKER_01: I think they both highlighted efficiency gains in their programs and increasing uh or improving supply-demand fundamentals in the Appalachian Basin as takeaway increase or takeaway for gas increases, which gives more access to markets.
• 5:11
  SPEAKER_01: Oventive announced they that they emphasized that their Permian production was coming in better than expected, and that they were actually getting more production per capex dollar spent.
• 5:24
  SPEAKER_01: I think that's what we look for from the rest of the producer group as we hear uh as we get more reports in the next couple of weeks, is that companies continue to drive longer lateral wells, which require greater stimulations, which drives the intensity, but it also increases their efficiency with the capital.
• 5:41
  SPEAKER_01: And there's a real focus on increasing production per dollar of capital spent among the producers.
• 5:47
  SPEAKER_01: I think the other thing that we'll hear is opposed to, like we addressed earlier, will companies increase capex?
• 5:53
  SPEAKER_01: I think the incremental cash flow that's generated by higher oil prices, especially on production that's not or on production that's not hedged, is really going to bolster balance sheets and further support companies' plans to return cash to shareholders through their dividends and share buybacks.
• 6:11
  SPEAKER_00: Okay.
• 6:12
  SPEAKER_00: So WTR's universe, as you know, includes four service companies FET, DNAW, SLECT Water Solutions, and Nesser.
• 6:19
  SPEAKER_00: FET is scheduled to report results this Thursday, and DNAW and SLECT the following week, and then Nesser in two weeks.
• 6:26
  SPEAKER_00: Um, what do you expect those companies to emphasize on their calls?
• 6:31
  SPEAKER_01: I think the read-through from Halliburton and Slumberger is probably that uh the the growth outlook for services sector internationally and in North America seems to be improving.
• 6:43
  SPEAKER_01: So I think what what we'll hear from FET and uh probably Nesser as well is in with respect to international markets, there's more of an emphasis on unconventional gas and in and ramping that up, especially in the Middle East, both in the Saudi Arabia and Kuwait, as well as some of the North African markets, that long-term is supportive of Nesser's growth outlook and FET as well, because they make a lot of uh products that enable customers to be more efficient with their operations, to develop their resources and safely and also return their own capital.
• 7:21
  SPEAKER_01: And I think those markets could help uh commercialize over time some of the opportunities that FET sees in what it calls growth out or growth markets, which underpin a multi-year revenue growth outlook for them and some of the ambitious 2030 goals that they've laid out.
• 7:37
  SPEAKER_01: For D Now it's probably more of a North American story.
• 7:40
  SPEAKER_01: I think if there's a rebounding uh activity levels in the US, especially in the Permian Basin, where I think Halliburton mentioned there's less white space in their calendar.
• 7:50
  SPEAKER_01: In other words, they're staying busy.
• 7:52
  SPEAKER_01: That's probably a positive for uh D Now.
• 7:55
  SPEAKER_01: They also have been working hard to resolve some software issues with the ERP system they acquired from or that they took on with the MRC Global merger late last year.
• 8:06
  SPEAKER_01: It sounds like on the first quarter call, they reported a lot of progress there, especially in the Permian.
• 8:12
  SPEAKER_01: So that should suit them well as they look at the balance of the year.
• 8:16
  SPEAKER_01: And then the last service company in our universe is Select, and Select is really turning into an infrastructure company, a water infrastructure company, and ongoing development activity in the Delaware basin, which still seems to be the focal point of a lot of the activity in the Permian, where some of the best rock and best economics are still available, ultimately is going to drive, we think, um visible product or increased visibility in select's earnings and cash flow profile over the next couple of years, which is really importantly underpinned by long-term contracts.
• 8:50
  SPEAKER_00: Unnoted.
• 8:51
  SPEAKER_00: So the producers in WTR's universe will start reporting results next week.
• 8:55
  SPEAKER_00: Our universe includes six U.S.
• 8:57
  SPEAKER_00: producers and two producers whose assets are located in Africa.
• 9:01
  SPEAKER_00: How do you think the U.S.
• 9:02
  SPEAKER_00: producers are managing commodity price volatility?
• 9:05
  SPEAKER_01: Yeah, most of the companies that are in our universe hedged much of their oil production, either late last year or early 2026.
• 9:14
  SPEAKER_01: So by and large, they're roughly two-thirds, 60% to two-thirds of production is hedged.
• 9:20
  SPEAKER_01: So 30% a third, roughly a third of production has been exposed to the oil price volatility.
• 9:26
  SPEAKER_01: The cash flow, I think, from that exposure probably goes toward uh balance sheet reduction, as part of what I said earlier that I don't really anticipate big capex increases this year.
• 9:36
  SPEAKER_01: Um high peak, ring, prairie are all focused on reducing debt and improving their balance sheets to better position them to grow in the future.
• 9:47
  SPEAKER_01: Uh, Riley is the one growth-oriented producer, domestic producer that we have, where their cap their oil or their capex plan in 2026 is expected to drive about 29% oil production growth by our estimates.
• 10:01
  SPEAKER_01: Um, so they they seem to be well positioned.
• 10:03
  SPEAKER_01: A lot of their growth in the first part of this year is coming out of their Texas assets, and that development drilling will probably shift more toward their New Mexico assets later this year and maybe into 2027 after a pipeline gets completed, which will increase the flow assurance for their gas production out of their red lake area.
• 10:22
  SPEAKER_01: The other domestic producer that we covered, WT offshore, is really focused in the Gulf of America.
• 10:30
  SPEAKER_01: They continue to be on the lookout for acquisitions.
• 10:33
  SPEAKER_01: So with respect to MA, I think that will play a part in their ability to find an accretive acquisition.
• 10:40
  SPEAKER_01: And then Evolution Petroleum, which is also an acquisitive company, has focused more this year or in their fiscal 2026, which ended on June, on mineral and royalty deals.
• 10:53
  SPEAKER_01: So we think over their outlook, when they'll they don't report actually until September, but their outlook will probably outlook will probably focus on the acquisition pipeline for mineral and royalty deals, which are very accretive, as well as non-operative working interests in the areas that they that they operate.
• 11:11
  SPEAKER_00: So speaking of acquisitive companies, I know MA has been a constant underlying theme in the ENP industry.
• 11:17
  SPEAKER_00: Um, how do you think volatility is affecting the expectations of both buyers and sellers as it relates to valuations and deal making?
• 11:25
  SPEAKER_01: You know, last week we saw a large acquisition where Magnolia Oil and Gas announced a$4.6 billion acquisition of a privately held company called Wildfire Energy.
• 11:35
  SPEAKER_01: There were some media reports out, oh, I think on Thursday or Friday last week that Devin was considering uh divesting assets in the Powder River Basin up in Wyoming, as well as the Eagleford Shale.
• 11:47
  SPEAKER_01: So the MA activity is continuing.
• 11:51
  SPEAKER_01: I think maybe decreased volatility would help facilitate buyers and sellers being able to come to terms with um with valuations.
• 12:03
  SPEAKER_01: And remember, the long end of the curve is probably what dictates more about the asset valuations because that's what companies can bake into their estimates of value.
• 12:13
  SPEAKER_01: Um and right now the long end of the curve is closer to$70 a barrel than the front end, which is today in the low 80s.
• 12:21
  SPEAKER_01: So I think the long end of the curve and stability is helps.
• 12:25
  SPEAKER_01: I think what we'll see over the balance of this year and in the next is continued asset rationalization by companies that have been big buyers in recent years as they look to rationalize their asset base and focus on the where on where they see the best growth opportunities and put assets that they won't get to for some time into the hands of somebody who might work them sooner, and that's a way to bring value forward in their in the way they think about running their business.
• 12:51
  SPEAKER_00: Okay.
• 12:52
  SPEAKER_00: I know free cash flow is always kind of a focal point in this industry, so with that in mind, um, do you expect U.S.
• 12:58
  SPEAKER_00: producers to increase CapEx based on the recent increase in oil prices?
• 13:03
  SPEAKER_01: No, I think they'll probably stick to their free cash flow uh objectives.
• 13:07
  SPEAKER_01: I think again, I think the the producers, large and small, business strategies seem to be anchored by investing in modest or stable production to modest growth, and using whatever free cash flow is left over to if to improve balance sheets if that's required, and or to fund uh shareholder payouts through dividends and repurchases.
• 13:31
  SPEAKER_01: Most many companies, large and small, have uh share buybacks in place.
• 13:35
  SPEAKER_01: Many have dividends.
• 13:37
  SPEAKER_01: I think we'll see free cash flow continue to go to support those efforts rather than significant increases in capex.
• 13:44
  SPEAKER_00: And as we wrap up, just a couple additional questions for you, Jeff.
• 13:46
  SPEAKER_00: I know Marin Energy and Valco Energy's assets are located in Africa.
• 13:51
  SPEAKER_00: Are either of them seeing any impacts from the military action in the Persian Gulf?
• 13:56
  SPEAKER_01: Oil prices in in West Africa spiked because producer or consumers were looking for cargoes that didn't have to go through the Strait of Hormuz.
• 14:06
  SPEAKER_01: So we could see some price benefit in the second quarter from that.
• 14:12
  SPEAKER_01: I think really what the driver for both Mirin and Valco will be over the balance of this year and then into next year is they both have development drilling programs, which are expected to commence in the second half of 2026.
• 14:26
  SPEAKER_01: Mirin in West Africa and Nigeria in particular, where the operators of their two big field complexes, Chevron and Total Energies, are expected to bring rigs in and restart development drilling programs after a several year hiatus that that could impact 2027 volumes and beyond based on the timeline of some of those projects.
• 14:47
  SPEAKER_01: They also have exposure to a to the Venus oil discovery, which is in deep water offshore uh Namibia in the Orange Basin.
• 14:56
  SPEAKER_01: Totel Energies is also the operator of that, and they are working toward an FID for that project in the second half of 2026.
• 15:04
  SPEAKER_01: So that again, that's another long-term potential catalyst for uh for Miren.
• 15:09
  SPEAKER_01: With respect to Valcode, they restored production in their Valbob field in Côte d'Ivoire in the second quarter of this year, and the operator CNR is expected to bring a rig in to commence a development drilling program in the second half of this year.
• 15:25
  SPEAKER_01: The real production benefit from that program is also expected to commence in 2027.
• 15:31
  SPEAKER_01: And both those companies have long-term catalysts uh with in their asset bases that expose them to organic growth over the next several years.
• 15:38
  SPEAKER_01: So it'll be interesting to watch how that develops in the next several quarters.
• 15:43
  SPEAKER_00: Excellent.
• 15:44
  SPEAKER_00: Well, thanks for joining me today, Jeff, to uh discuss the upcoming second quarter earnings season for Water Towers Universe.
• 15:50
  SPEAKER_00: And let's reconvene in a few weeks to see whether there were common themes about how the industry is approaching the remainder of 2026 based on comments that emerged from the upcoming quarterly calls and associated uh earnings releases themselves.
• 16:04
  SPEAKER_01: Thanks, Jeff.
• 16:06
  SPEAKER_00: Thank you for listening, and don't forget to subscribe as well as visiting watertower research.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules.
• 16:22
  SPEAKER_00: We will see you next time for another edition of the WTR Small Cap Spotlight Podcast.
• 16:27
  SPEAKER_00: Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.