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Can Chevron (CVX) Q1 Earnings Stop Its Stock's Slide?

Nilanjan Choudhury

U.S. energy giant Chevron Corp. CVX is set to release its first-quarter 2017 results before the opening bell on Friday, Apr 28.

What Investors Need to Know

Chevron is one of the worst performing Dow stocks so far in 2017. The energy giant's scrip is down more than 9% year to date. Moreover, the San Ramon, CA-based company has a poor industry rank. It is a major player in the Oil & Gas - International Integrated industry, which is ranked 155 out of the 256 industries in our coverage (bottom 39%). Chevron also has a Zacks Rank #3 (Hold) with a ‘C’ for its VGM Score, so fundamentals are pretty tepid for this stock.

To make things worse, the second-largest U.S.-based oil company after ExxonMobil Corp. XOM doesn’t exactly have a great track record when it comes to earnings. Investors should note that Chevron has missed estimates in two of the last four quarters, as you can see in the chart below:

Chevron Corporation Price and EPS Surprise

 

Chevron Corporation Price and EPS Surprise | Chevron Corporation Quote

Earnings estimates have also been sluggish for the stock, as the consensus first-quarter estimate has been going down over the past 30 days. This is something that investors definitely don’t want to see heading into a report.

On an encouraging note though, Chevron’s unimpressive stock performance notwithstanding, the company has managed to beat the broader industry across the past six months- and 1-year periods.

Therefore, true to Chevron’s ‘Hold’ rating, the signals are mixed and it seems as if it could be a rockier report than one might think.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

At the end of the first quarter, oil was trading at $50.60 per barrel, while natural gas hovered around the $3.20 per million British thermal units – both in a sweet spot compared to the corresponding period of 2016. While crude slumped to a 12-year low in the year-ago quarter, natural gas futures dropped to its worst level in almost 17 years.

All this bodes well for Chevron and its upstream unit in particular. Improving commodity prices would also considerably augment the company's cash flows. Chevron’s successful cost reduction initiatives and efficiency gains are expected to further cushion the results. At $22.4 billion, the company’s capital and exploration expenditure for the last year has run 34% lower than in 2015.

Worryingly, there are signs of weakness in the refining business, suggesting that the unit – which saved Chevron when crude prices plunged – could now be a drag. The fourth-quarter of 2016 saw the integrated behemoth’s downstream segment income erode on lower margins from refined product sales.

Earnings Whispers

Our proven model does not conclusively show that Chevron will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.    

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -10.64%. This is because the Most Accurate estimate stands at 84 cents, while the Zacks Consensus Estimate is pegged higher, at 94 cents.

Zacks Rank: Chevron has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult. 

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Chevron, here are two firms from the energy space you may want to consider on the basis of our model, which shows that it has the right combination of elements to post earnings beat this quarter:

Tallgrass Energy G.P. L.P. TEGP has an Earnings ESP of +5.56% and a Zacks Rank #1. The company is likely to release earnings on May 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

NOW Inc. DNOW has an Earnings ESP of +17.39% and a Zacks Rank #2. The company is expected to release earnings results on May 3.

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Tallgrass Energy GP, LP (TEGP): Free Stock Analysis Report
 
NOW Inc. (DNOW): Free Stock Analysis Report
 
Chevron Corporation (CVX): Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM): Free Stock Analysis Report
 
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