The past week and a half has been high season for second quarter earnings reports from the energy space. Broadly speaking, earnings from our portfolio holdings have been strong and the outlook for the next few quarters looks bright.

Here’s my take on several recent earnings reports and recent news flow out of the energy patch.

Todco (NYSE: THE) was first recommended as a buy on June 10. My reasoning was simple: Todco operates commodity jack-up drilling rigs in the Gulf of Mexico and day-rates for such rigs are rising rapidly. Since that time, day-rates for jackups in the Gulf have continued to rise, approaching or slightly surpassing their 2001 peaks. Todco’s stock is up about 35 percent from that original recommendation in June.

I still see upside in the stock. In fact, Todco remains an under appreciated company because it still has several cold-stacked jack-up and inland barge rigs available. These rigs can be reactivated and placed on long-term contracts at high day-rates–the upside to earnings is tremendous.

I am maintaining the stock as a buy recommendation and will continue to track in the How They Rate table in The Energy Strategist. (This table can be found underneath the Proven Reserves and Wildcatters portfolios on the “Portfolios” tab of the Web site.)

But earnings are due out this Thursday for Todco and there’s scope for a pullback after that report comes out–there’s been a pattern recently of buying stocks going into an earnings report and then a selling of the good news once the report comes out. Therefore, I recommend that those who bought Todco in June sell out of half of their position and book profits. I also recommend raising your stop-loss on the remaining half position to $24.90, approximately breakeven on the trade.

General Maritime (NYSE: GMR) and OMI Corp (NYSE: OMM) were originally recommended as a pair trade and a play on the tanker segment–General Maritime as a buy, OMI as a short. General Maritime has slipped approximately 12.8 percent since its July 1 close and the stock reacted poorly after reporting earnings last week.  Fortunately, OMI Corporation, our recommended short position, is also down since July 1 to the tune of about 9.7 percent. This illustrates the power of the recommended pair trade–if you’re short OMI, it softened the blow of the recent slip in General Maritime considerably.

Nevertheless, the selloff in General Maritime is way overdone. In the company’s conference call, the analysts all focused on the double-hull/double-sided vessel discount. This seems to be the main negative to arise from the company’s earnings conference call.  Let’s review this concept.

There are basically three types tanker ships: single hulls, double hulls and double-sided vessels. The most modern ships are the double hulls, which offer added protection against oil spills. After those, the double-sided vessels offer the next best level of protection. The single-hull vessels are more prone to spills and tend to be older (almost all new vessels being built are double hulls). What’s more, the International Maritime Organization (IMO) is calling for all single-hulls to be phased out by the end of this decade.

General Maritime currently has 42 ships in its fleet with four more being built for delivery over the next few years. Of the current fleet, five are single-hulls–in fact, the new ships being delivered (all double-hulls) will be replacing those older ships. Genmar also has about 12 double-sided vessels (mainly all smaller Aframax vessels) currently in use.

Genmar’s modern double-hulled vessels earned about twice the day-rates of its double-sided vessels in the second quarter. The discount was particularly obvious among the Aframax tankers; double-sided vessels always trade at a discount, but this discount was much greater than normal.

There is a reason for this. Genmar decided to dry-dock many of its double-sided tankers in the second quarter to bring them into compliance with new IMO regulations. The result is that these vessels were not available for hire for much of the quarter, considerably lowering the average day-rates for these vessels. Of course, it makes sense to pursue a heavy dry-docking schedule in the second quarter, as this is seasonally the weakest for tanker rates anyway.

Bottom line: all but one of the IMO retrofits is complete. Furthermore, two-thirds of the company’s dry-docking schedule for the rest of 2005 is now complete, which means you can look for the double-hull/double-sided discount to close considerably this quarter. I am also still expecting a major, seasonal ramp-up in day-rates in the latter half of 2005, probably beginning in August or September. This should power a rally in the tanker group.

Genmar also announced a respectable $0.84 per share dividend for the quarter. This is a solid dividend for what’s seasonally one of the weakest quarters of the year for tanker day-rates. General Maritime is still a buy.

Teekay LNG Partners (NYSE: TGP), which owns a fleet of liquefied natural gas (LNG) carriers, all on long-term charter contracts, is our final play on the tanker shipping industry. Teekay LNG is a master limited partnership, meaning it pays out substantially all of its earnings as distributions to shareholders.

Teekay’s LNG contracts are all for 15 or 20 years, most are with major energy companies. The company has leased two tankers to the RasGas II consortium in Qatar. This project is being co-run by Qatar Petroleum and a subsidiary of ExxonMobil. Another two tankers are leased out for the Tangguh project in Indonesia on a 20-year contract–these tankers are being leased by a subsidiary of BP.

The beauty of these long-term contracts is that they offer stable cash flows unmatched in the crude oil tanker market. The market for LNG carriers will remain tight for some time so the integrated energy firms are more willing to commit tankers for multi-year contracts.

Teekay LNG had its initial public offering on May 10 and hosted its first earnings release and conference call last week. The company declared a solid $0.2357 distribution per unit of Teekay LNG held. This distribution was for the period from May 10 through the end of July and reflects only a month-and-a-half of operations. This annualizes to about $1.65, or a 5.1 percent yield.

And that’s just for starters–Teekay LNG is scheduled to buy more ships to be put on long-term contracts. Once the cash from those contracts starts rolling in unit holders can look forward to distribution hikes. Teekay LNG remains a buy.

Oil Services

Of all the oil sub-sectors, oil services companies offered the most upside surprise on earnings. Having reviewed results and conference calls from Halliburton, Schlumberger (NYSE: SLB) and Weatherford (NYSE: WFT), I see broad-based strength. These companies are seeing both strong demand and incredible pricing power–they’ve had no trouble hiking pricing for their services.

This reflects the beginning of a new exploration cycle. The exploration and production companies are starting to get worried about declining reserve-replacement ratios industry-wide. To combat this they’re starting to spend more on exploring for new reserves and on squeezing a bit more out of existing proven reserves. This is true all across the world; pricing seems to be particularly strong in hot markets like the North Sea and West Africa. Schlumberger and Weatherford remain the two best plays.