The earnings season is here again with nearly a quarter of S&P 500 companies having returned their Q4 and full FY 2019 scorecards--and it doesn’t make for pretty reading, especially by the pivotal Energy sector.
Energy investors who expected a late-2019 rise in oil prices to salvage fourth quarter earnings are in for a big disappointment. Somehow, the sector has once again managed to come out as the worst house in a bad neighborhood.
Blended earnings growth for S&P 500 companies is so far clocking in at -1.9%, putting the US market on course for the fourth consecutive decline in quarterly earnings since Q3 2015. A total of six sectors are reporting positive Y/Y earnings growth, led by the Utilities sector; four sectors are reporting Y/Y earnings decline led by the Energy sector, Consumer Discretionary, and Materials sectors, while the IT sector is reporting flat earnings.
Meanwhile, the blended revenue growth rate of 2.9% marks the lowest growth rate for the index since Q3 2016 (2.7%). Eight sectors are reporting positive revenue growth led by the Health Care, Utilities, and Communications Services sectors while three sectors are reporting a Y/Y decline in revenues led by the Materials sector and Energy sectors.
Energy Sector: 4 of 6 Sub-Industries to Report 20% or More Earnings Decline
The Energy sector is so far reporting the largest Y/Y earnings decline of all 11 US market sectors at -42.5%.
Earnings are looking pretty grim at the sub-industry level with four of the six Energy sub-industries expected to post earnings declines of 20% or more. Here’s a rundown of expected earnings for the six sub-industries:
- Oil & Gas Drilling (-74%)
- Oil & Gas Exploration & Production (-20%)
- Oil & Gas Refining & Marketing (-61%)
- Integrated Oil & Gas (-53%)
On a brighter note, two sub-industries have reported or are projected to report earnings growth of more than 10%:
- Oil & Gas Equipment & Services (28%)
- Oil & Gas Storage & Transportation (13%)
For the full year (FY 2019) the Energy sector is expected to report the lowest earnings growth of all 11 sectors at -30.5%, while revenue growth of -5.4% will only best the Material sector’s -17.7%.
Source: FactSet
Energy Sector Snapshot: Oil Majors Disappoint
Several oil majors including ExxonMobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A) and Chevron Corp. (NYSE:CVX) have reported Q4 earnings--and it’s been nothing to write home about. Related: General Motors To Spend $2.2 Billion On Detroit Electric Vehicle Plant
The largest energy company in the United States by market cap, ExxonMobil, reported Q4 Group Revenue of $67.17 billion, good for -6.6% Y/Y growth, but it still managed to top analysts' estimates by $2.59B. Net income was pegged at $5.69 billion, down a massive 70% Y/Y and the weakest in three years while Non-GAAP EPS of $0.41 missed by $0.04.
While the oil giant chose to highlight sequential earnings growth, Y/Y comparisons were unflattering with downstream earnings tumbling 67% to $898 million after U.S. crude prices fell from $77/barrel in September 2018 to $63 by the end of 2019.
Source: Exxon
Despite the squeezed earnings, the company’s management signaled no changes to 2020 capex projections of ~$33 billion- $35 billion, about 10% more at the midpoint compared to 2019 capex with major projects set to progress. Credit Suisse analyst William Featherston sees the company generating ~$13 billion in free cash flow in FY 2020 based on a price of $56 for Brent crude and $51 for WTI. Related: Why 2020 Could Be A Record Year For Oil Trading Giants
"We expect Exxon to provide 2020 volume guidance at its March 5th Analyst Day, though it should give some initial color on today’s call: our current volume forecast of ~4.14 million (barrels of oil equivalent per day) is modestly above consensus ~4.0 million Boed but just below Exxon's ’s somewhat stale 4.2 MMBoed guidance," he added.
Exxon plans to sell assets worth $25 billion across Europe, Asia, and Africa as it looks to free up more capital to invest in the massive oilfields in Guyana as well as the Permian Basin. The company is targeting to produce a million barrels per day in the Permian Basin by 2024.
XOM shares are toying with nine-year lows but have been clawing back some losses after climbing 1.1% after the report perhaps signaling that the bad news has already been baked in.
Royal Dutch Shell reported Q4 earnings a day before Exxon that were equally uninspiring. In fact, it acted as a major red flag for oil markets.
The Anglo-Dutch oil giant reported revenue of $84.01B, down 17.8% Y/Y but $5.41B above the consensus. Net profit of $2.9bn (£2.23bn) for the final quarter marked a decline from $5.7bn in the year-ago comparable quarter. Net income attributable to shareholders on a current cost of supplies (CCS) basis and excluding identified items--which is used as a proxy for net profit--clocked in at $16.462 billion for full-year 2019, a 23% Y/Y decline with the company citing challenging macroeconomic conditions as well as lower oil and gas prices.
RDS shares are getting hammered--down 2.7% in the morning session-- after the company announced it would slow investor payouts amid a global economic slowdown. Management warned that an unfavorable macroeconomic environment could negatively impact the pace of its $25 billion share buyback program:
“If we want to do everything that we said we needed to do, which is to continue to invest in growth, continue to buy back shares — $25 billion worth of it — and reduce the net debt then, of course, the macro will probably force some choices on us,” Ben van Beurden, CEO of Royal Dutch Shell, told CNBC on Thursday.
Chevron Corp. came out with Q4 2019 revenue of $36.35B (-14.3% Y/Y) which missed Wall Street consensus by $2.63B. Chevron posted a hefty $6.6 billion loss in the quarter thanks to $10.4 billion worth of write-offs related to sale of deep-water projects in the Gulf of Mexico as well as shale gas production sites in Appalachia. The company though did recognize a $1.2 billion gain on the sale of the U.K. Central North Sea assets. Chevron’s non-GAAP EPS of $1.49 beat by $0.03 while GAAP EPS clocked in at -$3.51.
Chevron’s full-year earnings tumbled 80% to $2.924 billion vs. $14.824 billion in 2018.
Despite the heavy losses, the company remains committed to returning cash to shareholders:
‘‘We paid $9 billion in dividends, repurchased $4 billion of shares, funded our capital program and successfully captured several inorganic investment opportunities, all while reducing debt by more than $7 billion. Earlier this week, we announced a quarterly dividend increase of $0.10 per share, reinforcing our commitment to growing shareholder returns,” Chevron CEO and chairman of the board, Michael Wirth, told CNBC.
BP is expected to report Q4 earnings on 4th February while Total S.A. is expected to do so on 6th February.
Still, there are plenty of promising oil companies to keep an eye on this year...
By Alex Kimani for Oilprice.com
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