This week, earnings season in the U.S. unofficially began when Alcoa (AA) reported first quarter earnings. For traders and investors who take an active role in managing their portfolios, earnings season is usually what they look forward to. However, most expect the next few weeks to be a trying time for those with a focus on energy. There will certainly be some bad news as the full effects of the drop in oil prices are felt in that sector, but it may not be as bad as some fear.
First and foremost, much of the bad news is already priced in. The fact that WTI crude was below $55 for the entire first quarter will have escaped no one, and analysts’ estimates of Q1 earnings for anybody in the energy sector have been falling for some time. The companies concerned, however, have had around seven months to adjust to the reality of falling oil prices. Now that things seem to have stabilized, the gloomiest outlooks are past us and those needing or hoping to raise capital, either through the issuance of equity or debt, have presumably already done so.
In other words, how much bad news can there be?
That said, it is still not certain that oil will hold at current levels, so wholesale buying of E&P companies in front of what is still likely to be generally low earnings represents a risky strategy. Those who, as I suggested, started to average into stocks in the sector when oil first reached the mid $40s may even want to hold off on some purchases until the…