The current earnings season for the energy sector has seen several oil service companies reduce earnings or revenue guidance for either 2011 or 2012, raising the issue of whether the energy cycle is sliding slowly into a downturn. (For more, see Earning Forecasts: A Primer.)

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The Transgressors
Dresser-Rand Group (NYSE:DRC) lowered guidance for both 2011 and 2012. The company expects operating income for 2011 to be in a range between $253 million and $258 million due to a shortfall in the final quarter.

The company attributed the reduction to lower new unit revenues, which are now expected to be $350 million, about $200 million less than previous guidance. The company said the shortfall was due to supply chain issues and customer deferral requests. The lower revenue pushed approximately $30 million in operating income into 2012.

Dresser Rand Group also reduced its outlook on operating income for 2012 due to currency effects. The company noted that the U.S. dollar has strengthened approximately 10% against the Euro since it set guidance back in November 2011. This will reduce operating income by approximately $30 million, and move the range from $390 million to $450 million down to $360 million to $420 million.

Cameron International (NYSE:CAM) established earnings guidance for the first quarter of 2012 to be in a range from 50 cents to 55 cents per diluted share, and the full year in a range from $3.20 to $3.30 per diluted share. These numbers exclude any one time accounting charges that Cameron might take during the periods.

Both of these ranges were below consensus estimates of $3.53 per diluted share for 2012 and 76 cents per diluted share for the first quarter of 2012, according to Bloomberg. Cameron is experiencing issues in both the Drilling & Production Systems and Valves & Measurement segments of the company. (To know more about income statements, read Understanding The Income Statement.)

Drilling and Production Systems
Cameron expects lower margins in 2012 in Drilling & Production Systems due to two factors. The company is seeing dilution from the purchase of LeTourneau Drilling Systems and Offshore Products, which the company purchased from Joy Global (NYSE:JOY) in 2011.

The company also estimates that revenues will decline in its subsea segment, but because it feels this business has better long-term prospects, Cameron has decided not to reduce its fixed costs. This will also depress margins in the first quarter of 2012.

Cameron expects both these factors to only last one quarter and estimates that margins will improve during the balance of 2012. In the Valves & Measurement segment, Cameron expects lower margins in the first quarter of 2012 due to a shift in product mix. The company also believes that this will last only one quarter.

One oil service company that did not experience issues similar to that of Cameron or Dresser Rand Group was National Oilwell Varco (NYSE:NOV). The company recently reported net income of $1.99 billion on sales of $14.7 billion for 2011.

The Bottom Line
Two oil service companies have lowered guidance for 2012, leading investors to ponder the question of whether this is a one time incident as the companies claim, or the beginning of a down cycle in the business. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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