So far, the fourth-quarter earnings season has exhibited a year-over-year deterioration in oil and gas companies’ performance owing to softness in crude prices. The coronavirus pandemic has hit the global economy hard, in turn hurting energy demand growth. However, sequential recovery in oil prices is providing a relief to the operators.
In the last reported quarter, the
Oils and Energy sector’s earnings plunged 100.4% year over year on 34.9% revenue deterioration. For the fourth quarter, overall earnings and revenues for the sector are projected to plummet 95.1% and 32.2% year over year, per the latest Earnings Preview. While companies like ConocoPhillips ( COP Quick Quote COP - Free Report) and a few others managed to beat fourth-quarter earnings estimates, many firms including Antero Resources Corporation ( AR Quick Quote AR - Free Report) and Baker Hughes Company ( BKR Quick Quote BKR - Free Report) missed the same. In fact, the oil/energy sector’s earnings are likely to witness the second highest decline among all the 16 sectors, with Aerospace in the first position.
Let’s look at the key factors that are likely to have impacted energy stocks during the fourth quarter.
Commodity Price Movement
As there is a high correlation between commodity price and earnings of energy companies, we should consider oil and natural gas price movements for the December 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 October, November, and December 2020, average WTI crude price was recorded at $39.40, $40.94 and $47.02 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 $53.96, $57.03, and $59.88, per EIA’s data. However, it is to be noted that crude price increased nearly 26% through the December quarter of 2020.
Now let’s take a look at the natural gas price data for the fourth quarter, which reflected volatility. Per EIA, for the month of October, November, and December2020, average natural gas prices were recorded at $2.39, $2.61 and $2.59 per million British thermal unit (Btu), respectively. The first and third month’s figures were considerably higher than the year-ago quarter, while the second month saw a decrease. In the year-ago comparable months, the metric was $2.33, $2.65 and $2.22 per million Btu, per EIA’s data. Hence, natural gas price averaged $2.53 per million Btu for the fourth quarter, indicating an increase from the year-ago average of $2.40.
Low year-over-year crude pricing scenario is likely to have resulted in a decline in profit levels. However, the silver lining is that the prices of both crude and natural gas significantly improved in the fourth quarter owing to a partial recovery in demand, with the easing of lockdown measures around the globe. Moreover, U.S. health regulators approved two coronavirus vaccines in the last month of the quarter, which boosted investor confidence in fuel demand recovery.This is expected to have led to a sequential improvement in profit levels for several energy companies.
Effect on Upstream 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. This improvement has encouraged producers to gradually return to their shale assets. This is evident from the fact that in the week through Oct 2, 2020, oil drilling rig count was 189 in U.S. resources, which jumped to 267 in the week through Dec 31, 2020, per Baker Hughes’ weekly rig count data. However, the huge year-over-year decline in crude oil prices is likely to have resulted in a fall in profit levels from the year-ago period.
Importantly, natural gas drilling rigs in the United States rose to 83 for the week through Dec 31, 2020 from 74 in the week through Oct 2, 2020, per Baker Hughes. The increase in gas prices is expected to have played a crucial role in the quarter’s overall production.
Apart from recovering hydrocarbon prices, cost-containment efforts and expenditure cut from upstream companies are likely to have enabled them to navigate through tough market conditions. The measures are expected to have supported their bottom line in the fourth quarter.
Energy Stocks Reporting on Feb 23
Given such a backdrop, let us see at how the following three upstream players are placed ahead of their fourth-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 upstream energy major is slated to report quarterly results after the closing bell. It missed earnings estimates in the last reported quarter due to reduced crude oil production volumes and realized prices. This was partially offset by higher natural gas and natural gas liquids (NGLs) production, along with their respective realized prices. Decreased oil and gas production expenses also boosted profit levels. 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 6.5%. This is depicted in the graph below:
The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is 66 cents per share and $1.8 billion, respectively. This indicates year-over-year earnings and revenue decline of 72% and 31.8%, respectively.
Our proven model predicts an earnings beat for Pioneer Natural this time around, as it has an Earnings ESP of +4.04% and a Zacks Rank #2.
Cabot Oil & Gas Corporation ( COG Quick Quote COG - Free Report) : The Houston, TX-based exploration and production company is scheduled to report quarterly results after the closing bell. In the last reported quarter, it beat earnings estimates on year-over-year increase in production volumes. Coming to earnings surprise, the company beat the Zacks Consensus Estimate in three of the last four quarters and met on another occasion, delivering an average surprise of 25.7%. 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 20 cents per share and $409.8 million, respectively. This indicates a year-over-year earnings and revenue decline of 33.3% and 11.2%, respectively.
The chances of Cabot Oil & Gas delivering an earnings beat this time around are low, as it has an Earnings ESP of -1.36% and a Zacks Rank #5 (Strong Sell).
Range Resources Corporation ( RRC Quick Quote RRC - Free Report) : It is an independent oil and gas company engaged in the exploration, development and acquisition of oil and gas properties, primarily in the Appalachian Basin and North Louisiana. It is slated to report quarterly results after the market closes. The company missed third-quarter earnings estimates due to lower natural gas equivalent production volumes and decreased gas price realization. This was partially offset by higher oil and natural gas liquids price realizations, as well as lower direct operating costs. As far as earnings surprises are concerned, it beat the Zacks Consensus Estimate in three of the last four quarters and missed once, delivering an average surprise of 105.4%. This is depicted in the graph below:
The Zacks Consensus Estimate for the bottom and top lines for the to-be-reported quarter is 6 cents per share and $510.2 million, respectively. This indicates a year-over-year earnings and revenue decline of 25% and 15.8%, respectively.
Similar to Cabot Oil & Gas, the chances of Range Resources delivering an earnings beat are low this time around, as it has an Earnings ESP of +8.79% but a Zacks Rank #4 (Sell).
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