So far this earnings season, oil and gas companies’ reports have exhibited a year-over-year deterioration in performance owing to softness in commodity prices. The coronavirus pandemic has hit the global economy hard, in turn bringing down energy demand growth.
In the last reported quarter, the Oils and Energy sector’s earnings plunged 152.2% year over year on 53% revenue deterioration. For the third quarter, overall earnings and revenues for the sector are projected to plummet 113% and 31.2% year over year, per the latest Earnings Preview. While companies like BP plc BP and a few others managed to beat third-quarter earnings estimates, many firms including TechnipFMC plc FTI and Crestwood Equity Partners LP CEQP missed the same. In fact, the energy sector’s earnings are likely to witness the second highest decline among all the 16 sectors.
Let’s take a look at the key factors that are likely to have impacted energy stocks during the third quarter.
Lower Commodity Prices
As there is a high correlation between commodity price and the earnings of energy companies, we should consider oil and natural gas price movements in the third quarter.
The West Texas Intermediate (WTI) crude price — the American benchmark — declined sharply owing to the pandemic, which resulted in demand destruction and supply build up. For the month of July, August and September 2020, average WTI crude price was recorded at $40.71, $42.34 and $39.63 per barrel, respectively, per data from the U.S. Energy Information Administration (“EIA”). The figures are considerably lower than the respective year-ago figures of $57.35, $54.81 and $56.95, per EIA’s data.
Moreover, the average price of natural gas declined the most on a year-over-year basis. Per EIA, for the month of July, August and September 2020, average natural gas prices were recorded at $1.77, $2.30 and $1.92 per million British thermal unit (Btu), respectively. The first and third months’ figures were considerably lower than the year-ago quarter, while the second month witnessed a marginal increase. In the year-ago comparable months, the metric was $2.37, $2.22 and $2.56 per million Btu, per EIA’s data.
Low year-over-year commodity pricing scenario is likely to have resulted in a decline in profit levels. However, the silver lining is that the prices of crude and natural gas have significantly improved since the second quarter owing to a partial recovery in demand, with the easing of lockdown measures around the globe. This might have led to a sequential improvement in profit levels for some energy companies.
Effect on Energy Companies
Recovering commodity pricing scenario is likely to have given some support to upstream businesses, owing to which, several companies can manage to deliver an earnings beat this time around. However, the remarkable year-over-year decline in oil and gas prices is likely to have resulted in a fall in profit levels from the year-ago period.
Refining and downstream operations are likely to have been affected by the pandemic since the global demand for refined products took a considerable hit. However, a partial resumption of economic activities due to the worldwide easing of lockdowns resulted in a recovery in fuel demand. This is likely to have favored the downstream business partially in the third quarter.
The midstream business, in contrast, is relatively less likely to have been affected by coronavirus-induced oil price volatility. This is because midstream infrastructures have been booked by shippers for the long term to transport liquids and refined products. However, lower transportation and throughput volumes might have partially dented profits.
Energy Stocks Reporting on Oct 30
Given such a backdrop, let us take a look at how the following three energy players are placed ahead of their third-quarter earnings release tomorrow.
Our proprietary model clearly indicates that a company needs to have the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Exxon Mobil Corporation XOM: This integrated energy mammoth is slated to report quarterly results before the opening bell. The company reported weak second-quarter results owing to lower oil-equivalent production, coronavirus-induced weak commodity prices, and reduced industry refining margins in both U.S. and non-U.S. operations. As far as earnings surprises are concerned, ExxonMobil beat the Zacks Consensus Estimate in two of the last four quarters and missed on the other two occasions, delivering an average surprise of 303.3%. This is depicted in the graph below:
Exxon Mobil Corporation Price and EPS Surprise
Exxon Mobil Corporation price-eps-surprise | Exxon Mobil Corporation Quote
The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is a loss of 27 cents per share and $49.5 billion, respectively. This indicates year-over-year earnings and revenue decline of 139.7% and 24%, respectively.
Our proven model does not conclusively predict an earnings beat for ExxonMobil this time around, as it has an Earnings ESP of -4.51% and a Zacks Rank #4 (Sell). (ExxonMobil to Report Q3 Earnings: What's in the Cards?)
Chevron Corporation CVX: Chevron, the only energy component of the Dow Jones Industrial Average, is set to report quarterly results before the opening bell. In the last reported quarter, the company missed the consensus mark due to lower oil and natural gas price realizations, plus decline in refined products margins. Coming to earnings surprises, the integrated energy giant beat the Zacks Consensus Estimate in three of the last four quarters and missed on another occasion, delivering an average surprise of 10%. This is depicted in the graph below:
Chevron Corporation Price and EPS Surprise
Chevron Corporation price-eps-surprise | Chevron Corporation Quote
The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is pegged at a loss of 21 cents per share and $26.1 billion, respectively. This indicates a year-over-year earnings and revenue decline of 113.2% and 27.7%, respectively.
The chances of Chevron delivering an earnings beat this time around are low, as it has an Earnings ESP of 0.00% and a Zacks Rank #4. (What's in the Cards for Chevron This Earnings Season?)
Imperial Oil Limited IMO: This is one of the largest integrated oil companies in Canada, mainly engaged in oil and gas production, petroleum products’ refining and marketing, as well as chemical business. It is slated to report quarterly results before the opening bell. The company reported better-than-expected second-quarter earnings driven by higher year-over-year natural gas production. As far as earnings surprises are concerned, Imperial Oil beat the Zacks Consensus Estimate in two of the last four quarters, missed once and met on the other occasion, delivering an average surprise of 92.5%. This is depicted in the graph below:
Imperial Oil Limited Price and EPS Surprise
Imperial Oil Limited price-eps-surprise | Imperial Oil Limited Quote
The Zacks Consensus Estimate for the bottom and top lines for the to-be-reported quarter is a loss of 9 cents per share and $3.4 billion, respectively. This indicates a year-over-year earnings and revenue decline of 121.4% and 48.2%, respectively.
Similar to ExxonMobil and Chevron, the chances of Imperial Oil delivering an earnings beat are low this time around, as it has an Earnings ESP of 0.00% and a Zacks Rank #3.
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