We are entering the heart of the Q4 earnings season for energy, with a host of companies expected to come out with results by the end of this week. This earnings season, extreme volatility in oil and natural gas prices might affect the company’s fortunes.
Q4 Report Card: Volatile Oil, Gas Realizations
A steady increase in the price of U.S. oil over the last two years culminated in the benchmark popping above $76 per barrel in early October, the highest level in nearly four years. Supply-side shocks out of Iran, Venezuela and Libya in the face of growing global consumption levels — especially in emerging markets such as China and India — put the oil market in a fundamentally tight spot.
Then, in a stunning reversal, oil faced a two-pronged attack: rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Oil’s troubles helped send the index into a tailspin, leading to a 40% drop from October highs. The fourth quarter saw oil benchmark in the United States plunge to a 17-month low of $42.53 a barrel on Christmas Eve. To be precise, the commodity finished December at $45.41 per barrel. A year ago, crude futures hovered around the $60 per barrel mark.
The plethora of jumps and drops meant that WTI prices eked out handsome year-over-year gain in October and a loss in December, while average monthly prices in November were essentially flat compared to a year ago.
Meanwhile, natural gas rose to a four-year high of $4.929 per MMBtu in mid-November. The early onset of winter, together with the lowest level of stocks in 15 years and demand from power plants and growing LNG shipments lifted the commodity to its highest level since November 2014. The fuel ended the quarter at $2.94 per MMBtu – essentially where it was a year ago.
However, on a monthly basis, natural gas futures in October, November and December rose 10%, 34% and 41%, respectively, from their respective year-ago averages.
Average Monthly Price Gains Leads to Bullish Expectations
This relatively solid backdrop is likely to aid the sector components. Consequently, the fourth-quarter numbers should be good on the corporate earnings front.
Per the latest Earnings Outlook report, the energy sector is poised to record the highest growth among all sectors in the fourth quarter. Per our expectations, the sector’s earnings are expected to grow 66.2% from fourth-quarter 2017 and the top line is likely to improve 15.1% from the year-ago level.
Stocks Expected to Report Earnings on Feb 1
Exxon Mobil Corporation XOM will report fourth-quarter 2018 earnings before the opening bell. The Irving, TX-based energy behemoth is expected to bear the brunt of weaker oil prices and low refining margins.
As far as earnings surprises are concerned, the company is on a slippery slope, having gone past the Zacks Consensus Estimate just once of the last four reports.
ExxonMobil is unlikely to deliver a positive earnings surprise in fourth-quarter 2018 too as it has the unfavorable combination of an Earnings ESPof -6.86% and a Zacks Rank #5 (Strong Sell).
(Read More: Why Is a Q4 Earnings Beat Less Likely for ExxonMobil?)
According to the Zacks model, a company with a Zacks Rank #1, 2 or 3 (Hold) has a good chance of beating estimates, if it also has a positive Earnings ESP. Meanwhile, Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.
Exxon Mobil Corporation Price and EPS Surprise
Exxon Mobil Corporation Price and EPS Surprise | Exxon Mobil Corporation Quote
Meanwhile, Chevron Corporation’s CVX fourth-quarter 2018 results – scheduled ahead of the closing bell – are expected to benefit from production growth but weakness in oil prices and lower refining margins are likely to impact overall results of the firm.
The second biggest American energy major carries a Zacks Rank #3 and an Earnings ESP of +0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, the company’s results surpassed the Zacks Consensus Estimate in two the trailing four quarters, delivering an average negative earnings surprise of 5.66%.
Chevron Corporation Price and EPS Surprise
Chevron Corporation Price and EPS Surprise | Chevron Corporation Quote
Canadian integrated energy player Imperial Oil Limited IMO is also scheduled to report fourth-quarter 2018 results before the opening bell. Regarding earnings surprise history, Imperial Oil has a mixed record of beating estimates twice in the trailing four quarters.
The company is expected to benefit from the diversified portfolio of upstream and downstream assets. Imperial Oil’s integrated business model helped neutralize the impact of the widening crude oil price differentials which hurt the upstream segment of the Canadian explorer.
Moreover, the Calgary-based operator operator has a favorable combination of a Zacks Rank #3 and an Earnings ESP of +15.72%.
Imperial Oil Limited Price and EPS Surprise
Imperial Oil Limited Price and EPS Surprise | Imperial Oil Limited Quote
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