The Zacks Analyst Blog Highlights: Nexen, Suncor Energy, The Goldman Sachs Group, Ocwen Financial and Morgan Stanley

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Jul 18, 2011, 09:30 ET

CHICAGO, July 18, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Nexen Inc. (NYSE: NXY), Suncor Energy Inc. (NYSE: SU), The Goldman Sachs Group Inc. (NYSE: GS), Ocwen Financial Corp. (NYSE: OCN) and Morgan Stanley (NYSE: MS).

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Here are highlights from Friday's Analyst Blog:

Nexen Inc.'s (NYSE: NXY) second-quarter 2011 income from continuing operations of 47 US cents per share (45 Canadian cents) inched past the Zacks Consensus Estimate of 45 US cents and improved from 41 US cents in the year-earlier quarter.

The outperformance was due mainly to higher price realization, partially offset by output issues in the company's North Sea and Yemen operations.

Total revenue jumped more than 14% to C$1,602 million (US$1,654.7 million) from the year-earlier level of C$1,401 million (US$1,363.2 million).

Operational Performance

During the quarter, production before royalties averaged 204,000 barrels of oil equivalent per day (MBOE/d), or 180 MBOE/d net of royalties, comprising 79% liquids and 21% natural gas.

Production before royalties fell approximately 18% year over year and, on a net-of-royalty basis, it decreased approximately 17%. Lower production mainly reflects unscheduled maintenance at Buzzard as well as disruptions in a third-party operated natural gas export pipeline. Scheduled downtime at Syncrude also hurt the quarterly volume.

Nexen's average oil price realization during the quarter was C$110.28 per barrel, up 44.7% year over year. Natural gas average price realization was C$4.75 per Mcf, up 7.5% year over year.

Financials

Nexen spent C$530 million on capital programs during the quarter. As of June 30, 2011, the company had C$1,312 million in cash and C$4,150 million in long-term debt, with a debt-to-capitalization ratio of 33.7% (down from 37.3% in the previous quarter).

Guidance

As a result of production interruptions, Nexen lowered its full-year production (before royalties) target to the range of 210−230 MBOE a day. In its previous forecast, Nexen set its production at the lower end of 230–270 MBOE/d.

Outlook

Calgary-based Nexen's diversified portfolio of exploration and production (E&P) assets includes high-impact exploration prospects in the U.S. Gulf of Mexico, offshore West Africa (primarily Nigeria) and the North Sea. This provides the company with a multi-year inventory of development projects and a positive long-term production-growth profile.

The company has been actively investing in its upstream assets in recent years, which has significantly improved its long-term production-growth prospect. In the reported quarter, Nexen's Long Lake production improved 9% from the year-ago period and generated positive cash flow.

Nexen also expects its Usan project to commence production in the first half of 2012 and highlighted a number of growth prospects. Nexen got drilling permits for Appomattox appraisal well and Kakuna exploration well in the deepwater Gulf of Mexico and started drilling operations in the Kakuna well. The company also has an industry-leading pace of drilling activities at its shale gas operations in Horn River and enjoys strong interest in joint ventures.

However, in the reported quarter, Nexen failed to reap comprehensive financial gains due to an upgrading program at its Buzzard platform in the North Sea, which impeded production. Yemen production was also hit in the reported quarter due to the labor strike in May.

Again, tough competition from peers such as Suncor Energy Inc. (NYSE: SU), as well as problems of execution in the company's line-up of long-cycle projects persist. Hence, we prefer to stay on the sidelines and maintain our long-term Neutral recommendation. Nexen also holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

Earnings Preview: Goldman Sachs

The Goldman Sachs Group Inc. (NYSE: GS) is scheduled to report its second-quarter 2011 results before the opening bell on Tuesday, July 19.

The Zacks Consensus Estimate for the second quarter is $2.42 per share, representing a decline of about 12% from the year-ago quarter.

We expect Goldman to benefit from its well managed global franchise, strong capital base and industry leading position in trading and asset management. Moreover, improved client activity and overall revenue enhancement in the last qaurter, along with Goldman's prudent business model and strong fundamentals, are expected to deliver better earnings. However, regulatory issues, including lawsuits, are expected to dent the financials of the company in the upcoming quarters.

Previous Quarter Performance

Goldman's first-quarter 2011 earnings per share of $1.56 outpaced the Zacks Consensus Estimate of 79 cents, but compared unfavorably with $3.79 in the prior quarter and $5.59 in the prior-year quarter. Results included a preferred dividend of $1.64 billion related to the redemption of Goldman's Series G Preferred Stock. With improving economic conditions, the company gained from a solid balance sheet and global clients growth. The total revenue increased compared with the prior year. However, a poor performance was recorded in the Institutional Client Services division. Also, operating expenses increased.

Net income applicable to common shareholders in the quarter was $908 million compared with $2.2 billion in the prior quarter and $3.3 billion in the prior-year quarter.

Earnings Estimate Revisions – Overview

Prior to the results, earnings estimate significantly decreased from $2.76 to $2.42 over the last 7 days. The decline in estimates indicate weakness in the stock.

Agreement of Analysts

Looking at the estimate revision trends, it is quite clear that analysts are in agreement with the bearish second-quarter earnings outlook for Goldman. Of the 19 analysts covering the stock, four have lowered their estimates over the last 7 days.

Moreover, for FY11 and FY12, five of the total analysts have decreased their estimates over the last 7 days. This indicates strong downward pressure on the performance of the stock in the near term.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the second quarter plummeted to operating earnings of $2.42 per share from $2.76 over the last 7 days. Moreover, estimates for FY11 moved down from earnings per share of $13.27 to $12.71. For FY12, estimates dropped from $18.22 per share to $17.91.

Earnings Surprise

Goldman's performance has been volatile over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 39.7%.

By and Large

In June 2011, Goldman announced the sale of its mortgage-servicing subsidiary, Litton Loan Servicing to Ocwen Financial Corp. (NYSE: OCN) for about $263.7 million. The transaction will provide Ocwen with $41.2 billion of servicing portfolio in the form of unpaid principal balance primarily related to non-prime residential mortgage loans. Moreover, it would provide Goldman with the servicing platforms based in Houston and Dallas. The acquisition is expected to close in the late third quarter or early fourth quarter of 2011.

Even in a volatile macro environment, Goldman continues to invest in client franchise and foresees new market expansion. In March 2011, the asset-management unit of Goldman agreed to acquire India's Benchmark Asset Management Co. (BAM), a big provider of exchange-traded funds (ETFs).

However, sluggish lending activity remains the major concern for Goldman at this point. As net interest margin (NIM) remains under pressure, its traditional banking businesses may face challenges. Moreover, with the new banking regulations, pressure on fees and loan growth is expected to remain feeble. We expect NIM to remain depressed at least till the end of 2011.

Conclusion

The estimate revision trends and magnitude of revision reflect a significant likelihood of downward pressure on the shares over the near term.

Goldman currently retains its Zacks #5 Rank, which translates into a short-term 'Strong Sell' rating. Moreover, considering the company's business model and fundamentals, we have a long-term "Underperform" recommendation on the stock.

Close on the heels of Goldman, among other major banks, is Morgan Stanley (NYSE: MS), which is scheduled to report on July 21.

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