As expected, softness in commodity prices compared with the year-ago period is affecting oil and gas companies’ profit levels this earnings season. The coronavirus pandemic has not only hit global economies hard but also significantly hampered energy demand growth. Moreover, the oversupplied energy market did not do any good for oil and gas price levels.
However, commodity prices recovered sequentially, resulting in an improved market scenario from the second quarter. For the June quarter, the
Oils and Energy sector’s earnings plunged 152.2% year over year on 53% revenue deterioration. In the third quarter, some of the destroyed demand was restored as lockdowns and travel bans were lifted in many parts of the world. This led to partial energy demand recovery.
Let’s dig deeper.
Weak Commodity Prices
There lies a high correlation between earnings of energy companies and commodity prices. As such, considering the movement in the West Texas Intermediate (WTI) crude price — the American benchmark — will give us an insight into how oil and gas stocks might have fared in the third quarter. Per data from the U.S. Energy Information Administration (“EIA”), for July, August and September 2020, average WTI crude price was recorded at $40.71, $42.34 and $39.63 per barrel, respectively. The prices are considerably lower than the respective year-ago figures of $57.35, $54.81 and $56.95 per barrel.
Furthermore, the average price of natural gas dipped 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. In the year-ago comparable months, the metric was recorded at $2.37, $2.22 and $2.56 per million Btu, respectively. While the first and third months’ figures were considerably lower than the year-ago quarter, the second month witnessed a marginal year-over-year increase.
The decreased year-over-year commodity pricing scenario is likely to have resulted in a decline in profit levels. However, prices of crude and natural gas have significantly improved from the second quarter owing to a partial recovery in demand. This is expected to have led to sequential growth in profit levels for the energy companies.
Effect of Commodity Prices on Energy Firms
The commodity price recovery is likely to have given some relief to
exploration and production businesses, due to which, several companies can accomplish an earnings beat this time around. However, the massive year-over-year drop in oil and gas prices is likely to have resulted in profit deterioration from the year-ago quarter.
Since global demand for refined products took a substantial hit due to the pandemic,
refining and downstream operations are likely to have witnessed lower income. However, partial resumption of economic activities in the third quarter resulted in a revival in fuel demand, which is likely to have favored downstream businesses. Midstream operations, in contrast, are less likely to have been affected by oil price volatility caused by the pandemic. As midstream infrastructures are booked by customers for the long term to ship commodities, these are more immune to short-term fluctuations. However, lower transportation and throughput volumes might have partially reduced their profit levels. Energy Stocks Reporting on Nov 4
Given such a backdrop, let us take a look at how the following four 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. Pioneer Natural Resources Company ( PXD Quick Quote PXD - Free Report) : This leading upstream energy company is slated to report quarterly results after the closing bell. The company reported narrower-than-expected second-quarter loss owing to higher oil equivalent production volumes. This was partially offset by lower realized prices of crude. As far as earnings surprises are concerned, Pioneer Natural beat the Zacks Consensus Estimate in three of the last four quarters and missed once, delivering an average surprise of 7.5%. This is depicted in the graph below:
The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is 14 cents per share and $1.5 billion, respectively. This indicates a year-over-year earnings and revenue decline of 93% and 35.7%, respectively.
Our proven model conclusively predicts an earnings beat for Pioneer Natural this time around, as it has an Earnings ESP of +36.90% and a Zacks Rank #3. (
Pioneer Natural to Report Q3 Earnings: A Beat in Store?) Apache Corporation ( APA Quick Quote APA - Free Report) : Apache, a global exploration and production company, is set to report quarterly results after the closing bell. In the last reported quarter, the company beat the consensus mark due to higher-than-anticipated production volumes. Coming to earnings surprises, the upstream energy firm beat the Zacks Consensus Estimate in three of the last four quarters and missed on another occasion, delivering an average surprise of 93.6%. This is depicted in the graph below:
The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is pegged at a loss of 37 cents per share and $979.8 million, respectively. This indicates a year-over-year earnings and revenue decline of 27.6% and 33.7%, respectively.
The chances of Apache delivering an earnings beat this time around are low, as it has an Earnings ESP of -11.93% and a Zacks Rank #3. (
Factors Likely to Decide Apache's Fate in Q3 Earnings) Marathon Oil Corporation ( MRO Quick Quote MRO - Free Report) : Marathon Oil is a leading oil and natural gas exploration and production firm, with operations in the United States and Africa. It is slated to report quarterly results after the closing bell. The company reported narrower-than-expected second-quarter loss driven by lower year-over-year production costs in the United States. As far as earnings surprises are concerned, Marathon Oil beat the Zacks Consensus Estimate in two of the last four quarters, while missed on the other two occasions, delivering an average surprise of 54.4%. This is depicted in the graph below:
The Zacks Consensus Estimate for the bottom and top lines for the to-be-reported quarter is a loss of 28 cents per share and $752.3 million, respectively. This indicates a year-over-year earnings and revenue decline of 300% and 44.1%, respectively.
The chances of Marathon Oil delivering an earnings beat are low this time around, as it has an Earnings ESP of +1.50% and a Zacks Rank #4 (Sell).
Cimarex Energy Co. ( XEC Quick Quote XEC - Free Report) : Cimarex, an upstream energy firm, focuses primarily on two areas: the Permian Basin and the Mid-Continent region. It is set to report quarterly results after the market closes. In the second quarter, the company reported weak results due to curtailed hydrocarbon production volumes and lower crude price realizations, partially offset by decreased production expense. Coming to earnings surprises, the upstream energy firm beat the Zacks Consensus Estimate in one of the last four quarters and missed on the other three occasions, delivering an average surprise of 7.1%. This is shown in the graph below:
The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is pegged at 18 cents per share and $376.4 million, respectively. This indicates a year-over-year earnings and revenue decline of 80.2% and 35.4%, respectively.
Similar to Marathon Oil, the chances of Cimarex delivering an earnings beat this time around are low, as it has an Earnings ESP of +32.16% and a Zacks Rank #4.
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