The oil markets continue to deteriorate as a strong US Dollar and very limited storage has helped US WTI crude continue to hit new lows. Since the Federal Reserve’s comments last week, the US Dollar has pulled back, which has led to oil seeing a small recovery, but this phenomena is not expected to last. Take IHS, a business research and services company that sees about 40% of its revenue come from the energy sector. IHS today reported first quarter earnings per share of $0.57 on revenue of $546.3 million. Analysts were looking for earnings per share of $1.36, on revenue of $552.7 million. However, the real bad news came when IHS downgraded its fiscal 2015 outlook to $5.77-$5.97 earnings per share from its original estimate of $6.10-$6.30 per share. Additionally, revenue outlook was downgraded to $2.27-$2.31 billion from the original $2.36-$2.4 billion.
Outlook cut due to 20-30% cuts in capex spending from energy companies
Obviously, energy companies are slashing costs to help them stay afloat during this low oil environment. Usually the first expenditures to go are research and non-essential services to production and drilling. With energy companies cutting spending to six year lows, this does not look good for companies such as IHS. To make matters even worse, IHS CEO Scott Key says that the company expects to lose $75 million this year from foreign exchange transactions alone due to the strong US Dollar, as the company gets 30% of its revenues overseas. This is significant because it shows that IHS is currently facing some extreme headwinds. However, IHS recently bolstered its strength in the automotive market with the purchase of Carfax and its parent company. Additionally, IHS says they will be leaning on industrial clients to help buoy earnings from energy losses.
IHS CEO Key sees oil prices recovering second half of 2015
Scott Key, CEO of IHS, says that he sees oil prices recovering in the second half of 2015, which would help fiscal earnings targets recover. However, it is widely seen in the oil realms that oil’s pain is likely to continue into 2016. The problem is that production remains strong amid oil producers worldwide. At the same time, demand is weak and this has led to a supply glut and a record storage figures. The continued storage issues will only continue to add to headwinds for the energy sector and it is unlikely to find resolve in 2015.
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Overall, IHS is in a tough spot. With 30% of revenues coming from outside the US and 40% of total revenues coming from energy sector, the headwinds continue to mount. However, reliance on the automotive industry and industrial sector may help IHS provide some buffer while the oil problems sort themselves out and US Dollar headwinds persist.