The third-quarter earnings season has taken center stage for the energy sector, with a host of companies expected to come out with results by the end of this week.
True to predictions, the energy sector has emerged as a clear winner, as evident from the Earnings Trend report dated Oct 31. So far, nearly 50% of the sector components enlisted on the S&P 500 Index have reported quarterly numbers, out of which 66.7% delivered an earnings beat and 60% trumped sales estimates. Moreover, overall earnings grew 138.6% and revenues were up 20.9%.
Bullish Expectations and Results
A look back at the Q2 earnings season reflects that the sector’s earnings recorded a massive 122.7% jump from the same period last year — by far the highest growth among all sectors — on 21.4% higher revenues.
In Q3 again, the energy sector is poised to see the strongest growth among all sectors. This is evident from the current upbeat projection of 92.2% year-over-year earnings growth for the sector. The top line is likely to record an improvement of 17.8% from the year-ago level.
So what’s going in favour of the energy sector?
Healthy Commodity Prices Drive the Sector
Average West Texas Intermediate (WTI) crude prices were recorded at $70.98, $68.06 and $70.23 per barrel in the month of July, August and September 2018, respectively, per data from the U.S. Energy Information Administration (EIA). These prices were considerably higher than the year-ago respective prices of $46.63, $48.04 and $49.82. Notably, oil prices were fuelled by concerns over U.S. sanctions on Iran, OPEC’s efforts to tighten the market and strong global demand.
Natural gas prices also fared well, following improving clean energy demand. The average monthly spot prices of the commodity for the respective months of third-quarter 2018 were $2.83, $2.96 and $3.00 per Million Btu, representing healthier prices than third-quarter 2017.
XOM and CVX in Spotlight
In view of this bullish sentiment surrounding energy stocks, investors are keenly awaiting Q3 reports of integrated energy bigwigs like Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) .
Needless to say, the upstream segment of the integrated companies will benefit from higher price realizations for their output. However, higher commodity prices will lower the margins of the downstream segment, limiting their total income. Evidently, such has been the case with two other leading integrated companies, namely BP plc (BP - Free Report) and TOTAL S.A. (TOT - Free Report) , which reported their quarterly results a few days back. While both the companies delivered earnings beat on output and pricing gains, weaker results from their downstream segment amid narrowing crack spreads limited overall earnings of both the supermajors.
Now let’s delve deeper into what’s in store for ExxonMobil and Chevron, which are slated to report third-quarter 2018 earnings on Nov 2, before the opening bell.
Notably, our proven model shows that for a stock to beat earnings estimates, it needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) .You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
ExxonMobil: Factors You Should Note Ahead of the Release
ExxonMobil has a leading position in the energy industry owing to the size and diversity of its asset base, both in terms of business mix and geographical footprint. However, the world’s largest publicly-traded oil company missed the Zacks Consensus Estimate in three of the trailing four quarters, delivering average negative earnings surprise of 10.97%. In the last reported quarter, the company reported weaker-than expected earnings on lower production volumes amid maintenance and turnaround activities.
This time as well, our proven model does not conclusively show that ExxonMobil will beat on earnings because the company does not have the right combination of the two key ingredients. While ExxonMobil carries a Zacks Rank #2, its Earnings ESP of 0.00% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.
Importantly, the Zacks Consensus Estimate for the quarter to be reported is pegged at a profit of $1.21 per share on revenues of $72.5 billion.
Notably, the Zacks Consensus Estimate for earnings after tax for ExxonMobil’s upstream segment stands at $4,518 million, significantly higher than $1,567 million recorded in the year-ago quarter on the back of improving energy landscape. However, stellar show from the upstream segment may be neutralized to a certain extent owing to lackluster performance ofits downstream segment amid lower margins. As such, the Zacks Consensus Estimate for earnings after tax for ExxonMobil’s downstream segment is pegged at $1,385 million, lower than $1,532 million recorded a year ago.
(Read More: What's in the Offing for ExxonMobil in Q3 Earnings?)
Chevron: Can Commodity Price Gains Offset Lower Refining Margins?
Energy giant Chevron’s existing oil and gas development project pipeline is among the best in the industry, targeting volume growth of 4-7% in 2018. The San Ramon, CA-based U.S. oil major missed the Zacks Consensus Estimate in two out of the trailing four quarters, delivering average negative earnings surprise of 5.26%. In the preceding three-month period, Chevron missed the consensus mark by 13.6%, pressured by drop in profits in the downstream business.
Notably, our proven model does not conclusively predict an earnings beat for the firm in the to-be-reported quarter. While Chevron carries a Zacks Rank #3, it has an Earnings ESP of 0.00%, which makes surprise prediction difficult.
While the company’s upstream segment is set to record solid numbers courtesy of crude price rally and output growth, weaker show from the downstream segment may dent Chevron’s overall earnings in the to-be-reported quarter. The Zacks Consensus Estimate for the quarter to be reported is pegged at a profit of $2.06 per share on revenues of $42.8 billion.
Evidently, the Zacks Consensus Estimate for oil price realizations is pegged at $69 a barrel, up 43.7% from the year-ago quarter.The company’s ‘oilier’ nature of its volume mix positions it to benefit from strengthening oil prices. Third-quarter production volumes stand at 2,877 Mboe/d, reflecting year-over-year growth of 5.8%. As such, the Zacks Consensus Estimate for Chevron’s upstream segment’s third-quarter income is pegged at $3.9 billion, significantly higher than the reported figure of $489 million in the corresponding quarter of 2017.
However, the company is likely to bear the brunt of weak refining margins, which are likely to impact the bottom line. As such, the Zacks Consensus Estimate for quarterly income of its downstream segment is $822 million, down more than 50% from a year ago.
(Read More: Will Chevron's High Oil Leverage Boost Q3 Earnings?)
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