Earnings season for the energy sector begins this week with two major oil services companies reporting financial results for the second quarter of 2012. These reports may increase volatility and provide trading opportunities as investors pick through and interpret management commentary on the strength of the drilling cycle in the United States.

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Earnings Season
Baker Hughes (NYSE:BHI) and Schlumberger (NYSE:SLB) will report earnings before the market opens on Friday, July 20, with the average estimate for earnings per share at 77 cents for Baker Hughes and $1 per share for Schlumberger, according to Yahoo! (Nasdaq:YHOO) finance.

Since both of these operators have a significant amount of business in the onshore U.S., these reports, along with the associated conference calls are expected to attract significant attention from investors trying to gauge the direction of drilling activity for the balance of 2012.

SEE: Oil And Gas Industry Primer

Hit and a Miss
The industry continues to search globally for new sources of oil and gas and reported mixed results last week. Petrobras (NYSE:PBR) reported finding oil in the Espirito Santo Basin located offshore Brazil, while Statoil (NYSE:STO) reported a dry hole in the Norwegian portion of the North Sea.

Noble Energy (NYSE:NBL) reported more productive wells from several fields in the deepwater Gulf of Mexico, and is currently producing 30,000 barrels of oil per day from this area. The company tempered the good news with the announcement that it was suspending appraisal drilling at the Deep Blue prospect, also located in the deepwater Gulf of Mexico.

Although Noble Energy did find some hydrocarbons in at two wells drilled at Deep Blue, the economics didn't justify further development here. The company will take a $118 million charge in the second quarter of 2012.

Despite disappointing results for some operators, the industry has not given up the hunt for oil and gas resources. Apache Corporation (NYSE:APA) announced that the it will soon drill its first exploration well offshore Kenya, as the company hopes to continue the streak of successes reported by Anadarko Petroleum (NYSE:APC) and others in offshore East Africa.

SEE: What Determines Oil Prices?

Unit Corp (NYSE:UNT) added to its acreage in the Mid Continent area of the U.S., picking up 84,000 acres for $617 million. The acreage is prospective for the Granite Wash, Marmaton, Cleveland and other various oil and gas plays. Noble Energy was the seller and has apparently decided to focus its resources on the Gulf of Mexico, the Eastern Mediterranean, Niobrara Shale and other areas.

Spending Cuts
Forest Oil (NYSE:FST) became the first operator to lower capital spending for the second half of 2012 due to the recent drop in crude oil and natural gas liquids prices. The company expects to spend between $190 million and $210 million in the second quarter of 2012, down from $435 million in the first half of the year.

It also plans to redirect capital to the development of the Eagle Ford Shale and away from the lower return plays in the final two quarters of the year. Investors should probably expect more announcements like these during the upcoming earnings season.

The Bottom Line
This will be an interesting week for investors as the earning season starts with two large oil service companies reporting at the end of the week. This first peak at earnings will only be a taste of what to expect for the rest of July and into August 2012.

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

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