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Big Oil's Q2 to Gain Big Time From Commodity Price Rally

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Some of the world’s top energy companies are set to report second-quarter earnings in the upcoming weeks. ExxonMobil XOM, Chevron CVX, Royal Dutch Shell (RDS.A), BP plc BP and TotalEnergies TTE will release their results sometime between Jul 29 and Aug 3.

While the returns improved in the third and fourth quarters of 2020 on gradually tightening fundamentals, the January-March period further reinforced the Oil/Energy sector’s stability. The second quarter should be even better as commodity prices have rebounded sharply, revisiting their multi-year highs following the vaccine progress and the ongoing macroeconomic recovery.

Let’s have a rundown:

In the first quarter, the “Big Oil” companies were aided by easing of the lockdown and an earlier-than-expected pickup in the commodity’s demand on the back of vaccine rollouts. Cash flow was strong due to higher realizations in oil and gas prices.

The April-June period not only promises a sequential improvement but also a significantly better one than the year-ago quarter when the energy sector was devastated by the pandemic-induced demand destruction and price plunge.

According to the U.S. Energy Information Administration, in April, May and June of 2020, the average monthly WTI crude price was $16.55, $28.56 and $38.31 per barrel, respectively. In 2021, average prices were $61.72 in April, $65.17 in May and $71.38 in June, i.e., much stronger year over year.

The news is also bullish on the natural gas front. In Q2 of 2020, U.S. Henry Hub average natural gas prices were $1.74 per MMBtu in April and rose marginally to $1.75 in May before tumbling to $1.63 in June. Coming to 2021, the fuel was trading at $2.66, $2.91 and $3.26 per MMBtu, in April, May and June, respectively. In other words, natural gas traded noticeably higher in all the three months.

All but Chevron reported first-quarter bottom line ahead of those in the corresponding period of 2020 thanks to rising prices. Industry observers are betting on further upside during the three months ended Jun 30, as oil and gas continue to surge amid slashing cost and capital expenditure.

Apart from higher earnings, the environment of strong commodity prices has helped the big energy operators to generate significant “excess cash,” which they intend to use to boost investor returns.    

As proof of this, British energy major BP, which had a solid start to the year after comfortably beating first-quarter earnings estimates, has announced plans of buying back shares. BP managed to lower its net debt below its $35-billion target and consequently decided to launch stock repurchases worth $500 million in the June quarter. The company was forced to cut its dividend at the height of the pandemic-led crisis but reported a dramatic increase in first-quarter operating cash flow to $6.1 billion.

Meanwhile, continental rival Shell will distribute 20-30% of cash flow from operations to shareholders starting from the second quarter, it said in an update last week. The Zacks Rank #3 (Hold) company credited “strong operational and financial delivery, combined with an improved macro-economic outlook” for the higher payouts. Investors should know that Shell slashed its quarterly dividend by two-thirds last year to weather the historic oil price crash and preserve cash. The cut was the first since World War II.

You can see the complete list of today’s Zacks #1 Rank stocks here.

ExxonMobil also recently expressed optimism that higher oil prices would contribute significantly to its second-quarter 2021 upstream earnings.

Overall, the energy behemoths will see sharply higher exploration and production results. However, the other important part of the supermajor’s business, the refining or the downstream unit, remains weak. While fuel usage has recovered as mobility increased — reflected by rising refinery utilization and margin numbers — jet fuel demand is yet to reach pre-pandemic levels. Thus, refining profitability is still well below five-year averages.

Nevertheless, it appears that the most painful downturn for the petroleum business is now a distant memory with energy biggies expected to follow up on a solid first quarter with an even better second quarter.

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