Earnings season is well and truly underway, with half of S&P 500 companies having returned their Q3 2023 earnings scorecards. Unlike recent seasons, the current one has been somewhat underwhelming for oil and gas as well as for the renewable energy energy sector. The sector is reporting the largest (year-over-year) earnings decline of all eleven sectors for Q3 at -38.1%, a far cry from the 2.7% average growth by the broad market. To give you an idea of how dire the situation is for oil and gas companies, FactSet has revealed that earnings growth by the S&P 500 would improve to 8.4% from 2.7% if you exclude the energy sector.
At the sub-industry level, three of the five sub-industries in the sector are reporting a year-over-year decrease in earnings of 20% or more: Integrated Oil & Gas (-51%), Oil & Gas Exploration & Production (-37%), and Oil & Gas Refining & Marketing (-20%). On the other hand, two sub-industries are reporting year-over-year earnings growth: Oil & Gas Equipment & Services (32%) and Oil & Gas Storage & Transportation (11%).
Lower year-over-year oil prices are contributing to the year-over-year decrease in earnings for this sector. Despite the rise in price during the month of September, the average price of oil (WTI) in Q3 2023 ($82.22) was still 10% below the average price for oil in Q3 2022 ($91.43). Looking ahead for the sector, analysts are predicting earnings declines of -21.4% and -9.8% for Q4 2023 and Q1 2024, respectively. However, analysts are calling for earnings growth of 22.4% in Q2 2024.
Big Oil Disappoints
Stocks of the U.S.’ biggest energy companies, Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX), have tanked after both companies posted disappointing results.
Exxon Mobil has reported Q3 Non-GAAP EPS of $2.27, $0.09 lower than the Wall Street consensus while Q3 revenue clocked in at $90.76B (-19.0% Y/Y), missing by $1.81B. Exxon reported that cash flow from operations was $16.0 billion, up $6.6 billion versus the second quarter. Capital and exploration expenditures were $6.0 billion in the third quarter, in-line with the company’s expectations and bringing year-to-date 2023 expenditures to $18.6 billion. For the full-year, Exxon said it expects capital and exploration expenditures to be at the top end of the guidance of $23 billion to $25 billion as the company continues to pursue value accretive opportunities.
“We delivered another quarter of strong operational performance, earnings and cash flows, adding nearly 80,000 net oil-equivalent barrels per day to support global supply,” Exxon chairman and CEO Darren Woods said during the company’s earnings call. Related: PetroChina Posts Record YoY Net Profit Growth
However, Exxon’s earnings call had a big positive: the company declared $0.95/share quarterly dividend, good for a 4.4% increase from prior dividend of $0.91. XOM shares now have a 3.53% forward yield.
XOM stock has tanked nearly 13% over the past 10 days and has returned -16.4% in the year-to-date, far worse than the 0.3% YTD gain by the energy sector and 7.8% return by the S&P 500.
The WSJ has reported that part of Wall Street remains skeptical about Exxonn's claims about its $60B acquisition of fellow shale operator Pioneer Natural Resources (NYSE:PXD), including its ability to double the amount of oil and gas it can recover from shale wells. Pioneer is currently the second-largest producer in the Permian Basin by oil production, and an entity formed by the two merged companies would make Exxon the largest producer in the Permian with production potential of ~1.2 million boe/day, overtaking current leader Occidental Petroleum (NYSE:OXY).
But Exxon CFO Kathryn Mikells has tried to ally those fears saying Investor feedback on the Pioneer acquisition has been "overwhelmingly positive.’’ Mikells has said that the company’s estimate for $2B in deal synergies is based on proven techniques and technologies the company already is using, and that it believes research investments in oilfield data and chemical cocktails used in fracking ultimately will bring further upside to its earnings.
Meanwhile, Exxon’s peer, Chevron, has not fared any better in the current earnings season. The company reported Q3 Non-GAAP EPS of $3.05, missing by $0.64 while revenue of $54.08B (-18.8% Y/Y) beat by $1.08B. Worldwide net oil-equivalent production was up 4% from the year-ago quarter primarily due to the acquisition of PDC Energy, Inc. Meanwhile, capex in the third quarter of 2023 was up over 50% from the year-ago period. The company is facing a litany of woes across the globe, including fracking problems that delayed production in the Permian Basin, and overseas refining operations that garnered only around half the profit analysts had expected.
Chevron’s $45B joint venture project that aims to boost production at its massive Kazakhstan oil field is suffering from additional delays, cost increases and a reduction in projected free cash flow. The company now sees costs at the Tengiz project increasing by 3%-5%, which CEO Mike Wirth has attributed to the complexities of the company's efforts to refurbish Soviet-era power infrastructure for the giant field. This means the company will have to pay an extra ~$1B for its share of the JV's capex, which in turn will take a 20% cut to operational cash flow in the coming year.
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CVX shares are down 16.3% YTD; thankfully, the selloff has earned it an upgrade by Bank Of America to Buy from Neutral with a $200 price target, saying the stock's 15% decline since shortly before the $53B Hess acquisition "makes little sense, not least when considering the positive impact Hess has on Chevron's outlook."
By Alex Kimani for Oilprice.com
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