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The Energy Sector is Surging: How Sustainable Are Earnings?

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Exxon (XOM - Free Report) and Chevron (CVX - Free Report) both missed estimates in their recent Q1 earnings reports. But the oil giants had blockbuster numbers otherwise. Exxon’s Q1 earnings soared +219.9% on +53% higher revenues, while Chevron’s earnings surged +278.2% on +69.8% stronger year-over-year sales.

It isn’t just these supermajors that are literally swimming in cash. Every type of business in the oil patch is thriving at the moment. There is no surprise why these companies are enjoying the sunshine, given what’s been happening to oil and natural gas prices lately.

The pandemic was tough on the oil patch, with the immediate aftermath of Covid lockdowns pushing oil futures prices into negative territory. But the rebound has been equally impressive. You can see this in the chart below that shows the Zacks Energy sector’s quarterly earnings in billion of dollars.

Zacks Investment Research
Image Source: Zacks Investment Research

As you can see above, the group lost money in the second quarter of 2020, when transportation activities came to a halt as a result of Covid lockdowns.

The sector’s profitability picture is even more impressive on an annual basis, as the chart below shows.

Zacks Investment Research
Image Source: Zacks Investment Research

Please note that what this chart and the earlier quarterly version are telling us is that the Zacks Energy sector is currently expected to bring in $179.6 billion in 2022 and $37.6 billion in 2022 Q1.

Interestingly, the sector’s expected earnings haul in 2022, as well as current estimates for the next two years, represent all-time records for the space, easily surpassing the previous record set in 2008 when oil prices climbed above $140 per barrel.

You can clearly see this in the chart below that shows a much longer period of time.

Zacks Investment Research
Image Source: Zacks Investment Research

The Energy sector is one of just a few sectors enjoying positive estimate revisions. In fact, the current estimate of aggregate 2022 total earnings for the sector have almost doubled in the last four months, as the chart below shows.

Zacks Investment Research
Image Source: Zacks Investment Research

Given this impressive revisions trend, it is no surprise that the sector has been the leader in stock market performance lately. You can see this in the one-year performance chart below that plots the Zacks Energy sector (blue line, up +30.8%) vs. the S&P 500 index (red line, down -2.2%), the Zacks Finance sector (green line, down -7%) and the Zacks Technology sector (orange line, down -14.5%).

Zacks Investment Research
Image Source: Zacks Investment Research

How sustainable these gains are will be determined by how enduring the current commodity price gains turn out to be. These stocks don’t need spiking oil prices, what they do need instead are stable prices. Greater confidence in the forward price curve will keep the revisions trend in the positive territory that should help these stocks not only sustain their recent gains, but actually build on them.

The 2022 Q1 Earnings Season Scorecard

We now have Q1 results from 437 S&P 500 members or 87.4% of the index’s total membership. Total earnings for these companies are up +8.9% from the same period last year on +14.6% higher revenues, with 79.4% beating EPS estimates and 75.3% beating revenue estimates.

Plenty of results are still to come, though the bulk of S&P 500 earnings are now behind us. This week brings in Q1 results from more than 1000 companies, including 21 S&P 500 members.

The comparison charts below put the 2022 Q1 earnings and revenue growth rates for these 437 index members in the context of what we had seen from the same group of companies in other recent periods.

Zacks Investment Research
Image Source: Zacks Investment Research

The comparison charts below show the Q1 EPS and revenue beats percentages for these 437 index members in a historical context.

Zacks Investment Research
Image Source: Zacks Investment Research

The beats percentages were earlier tracking at their lowest levels in recent quarters, but they have notably improved over the past week.

Looking at Q1 as a whole, with actuals for these 437 index members and estimates for the still-to-come companies, total earnings are expected to be up +9.4% on +13.2% higher revenues.

Excluding the -14.9% decline in Finance sector earnings, the growth rate for the index improves to +16.9%. On the other hand, the Energy sector has a very robust earnings profile at present, with the sector expected to bring in +238.1% more earnings than the year-earlier period on +60.3% higher revenues.

Excluding the hefty Energy sector contribution, earnings for the remainder of the index would be up only +3.4% on +9.8% higher revenues.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows the comparable picture on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Breaking Down the First Quarter Earnings Season So Far 


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