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Chevron (CVX) to Report Q3 Earnings: What to Expect?

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U.S. energy giant Chevron Corp. (CVX - Free Report) is set to release its third-quarter 2016 results before the opening bell on Friday, Oct 28.

What Investors Need to Know

The company’s stock performance has been pretty choppy lately, and it will be up to this coming release to set the trend heading into 2017.

However, the second-largest U.S. oil company by market value after Exxon Mobil Corp. XOM has a good industry rank – in the top 38% overall. Chevron also has a ‘B’ for its VGM Score and a Zacks Rank #2 (Buy), so fundamentals are pretty strong for this stock as well.

But the company doesn’t exactly have a great track record when it comes to earnings, as it has missed estimates in two of the last three quarters, as you can see in the chart below:

CHEVRON CORP Price and EPS Surprise

CHEVRON CORP Price and EPS Surprise | CHEVRON CORP Quote

Earnings estimates have also been sluggish for the stock, as the consensus estimate has been going down over the past few months. This is something that investors definitely don’t want to see heading into a report.

Therefore, notwithstanding Chevron’s ‘Buy’ rating, the signals are mixed and it seems as if it could be a rockier report than one might think.

Factors to Consider This Quarter

Unlike the last quarter, where oil advanced more than 26% sequentially to notch up the best quarterly percentage gain in 7 years, the Jun-Sep 2016 period turned out to be a rather flat one with crude barely advancing. In fact, the West Texas Intermediate (WTI) crude futures during the third quarter hovered around the $45 per barrel mark, flat from the second quarter and down from $46.50 in the same period last year. This does not bode well for Chevron – one of the most oil-weighted majors.

Worryingly, there are signs of weakness in the refining business, suggesting that the unit – which saved Chevron when crude prices plunged – could now be a drag. The second quarter saw the integrated behemoth’s downstream segment income erode on fuel oversupply and weak demand. With refined product inventories remaining at their maximum seasonal levels in at least 20 years and margins set to narrow, Chevron could be in for more trouble in the to-be-reported quarter.

Finally, disruptions and asset sales could hamper the company’s production – as it did in the previous quarter.

However, to a large extent, Chevron’s successful cost reduction initiatives are expected to cushion the results. At $12 billion, the company’s capital and exploration expenditure for the first half of this year has run 31% lower than in the equivalent period of 2015.

Earnings Whispers

Our proven model does not conclusively show that Chevron will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

That is not the case here as you will see below.     

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at 40 cents.

Zacks Rank: Chevron has a Zacks Rank #2. Though a Zacks Rank #2 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Chevron, here are two companies from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

CONE Midstream Partners L.P. CNNX has an Earnings ESP of +2.7% and a Zacks Rank #1. The partnership is expected to release earnings results on Nov 4. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Antero Resources Corp. AR has an Earnings ESP of +25.00% and a Zacks Rank #2. The company is anticipated to release earnings on Oct 26.

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