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Oil Majors Are Primed For A Massive Earnings Season

Earnings season is here with us once again, with a quarter of S&P 500 companies having reported second-quarter 2021 earnings. According to FactSet data, 88% of S&P 500 companies have reported a positive EPS surprise, while 86% have reported a positive revenue surprise.

The good news for oil and gas investors: The long-suffering sector is on course for a repeat of a stellar first quarter by posting blowout earnings, again, in large part due to an increase in oil and gas prices.

Three-quarters of energy companies that have reported earnings have exceeded expectations, while half have managed to surpass revenue expectations.

Even better: The energy sector's expected revenue growth of 92.1% is a high watermark for the entire U.S. market.

The energy sector is expected to report earnings of $13.9 billion for Q2 2021 compared to a loss of -$10.6 billion in Q2 2020, thanks to vast improvements in commodity prices especially crude, which averaged $$66.17/bbl in Q2 2021 compared to $28/bbl in Q2 2020 and $61/bbl in Q1 2021.

All five sub-industries of the energy sector, namely Integrated Oil & Gas, Oil & Gas: Exploration & Production, Oil & Gas Refining & Marketing, Oil & Gas Equipment & Services and Oil & Gas Storage & Transportation, are reporting (or are projected to report) a year-over-year increase in earnings.

Here's where it gets interesting: American oil and gas supermajor ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are expected to be the largest contributors to the improved earnings for the sector, with the two companies expected to account for $13.3 billion of the $24.6 billion year-over-year increase in earnings for the sector.

The major themes

That said, Wall Street is warning that the earnings season might not be smooth-sailing because investors will not only be looking at the usual top-and bottom-line numbers but will also focus on three major themes: Dividend distributions, energy transition, and climate risk.

Analysts at Morgan Stanley have noted that energy major share prices are becoming increasingly anchored by their dividend distributions. Unfortunately, Big Oil's dividend expectations remain "rather static" despite substantial increases to free cash flow forecasts, the bank has said.

MS says energy investors are only valuing the cash flow paid to them and are giving little credit to cash flow retained within companies for expansion purposes.

It's a sentiment that has been supported by Clark Williams-Derry, energy finance analyst at IEEFA, a non-profit organization, and Kathy Hipple, a finance professor at Bard College in New York.

Williams-Derry has warned that there's a "tremendous degree" of investor skepticism regarding the business models of oil and gas firms, thanks to the deepening climate crisis and the urgent need to pivot away from fossil fuels. Indeed, Williams-Derry says the market kind of likes it when oil companies shrink and aren't going all out on new production but instead use the extra cash generated from improved commodity prices to pay down debt and reward investors.

Meanwhile, Hipple has argued that oil and gas companies can no longer afford to brush off the ongoing climate crisis from flooding in Europe and China to extreme heat in the Pacific Northwest.

"Oil companies that ignore climate in their earnings calls will be seen as laggards. Long-term investors will conclude they are financially risky," she has told CNBC.

The numbers

Here's how American oil and gas supermajors are expected to perform in the current earnings season:

#1. ExxonMobil

Exxon Mobil Corporation is expected to report second-quarter earnings on 30th July, 2021, before the market opens. The report will be for the fiscal quarter ending Jun 2021. 

Exxon has a consensus EPS forecast for $1.01 compared to $-0.7 posted during Q2 2020 and revenue of $63.96B. Exxon has exceeded earnings expectations for three straight quarters.

All eyes will be on ExxonMobil's climate goals after the company lost three board seats to Engine No. 1, an activist hedge, in a stunning proxy campaign. Engine No. 1 told the Financial Times that Exxon will need to cut fossil fuel production for the company to position itself for long-term success. "What we're saying is, plan for a world where maybe the world doesn't need your barrels," Engine No.1 leader Charlie Penner told the FT.

#2. Chevron

Chevron Corporation is expected to report earnings on 30th July, 2021, before the market opens. The report will be for the fiscal quarter ending June 2021. 

Chevron has a consensus EPS forecast for the quarter of $1.59 compared to an EPS of -1.59% for last year's comparable quarter and a revenue estimate of $35.98B. Chevron has missed the last two earnings estimates.

Chevron was one of the companies that were recently downgraded by HSBC's Gordon Gray, saying that Big Oil stocks will struggle to make progress amid market concerns about its ability to switch swiftly to renewable energy despite improving cash flows.

"With low-carbon assets set to contribute only 10%-15% of estimated earnings by 2030, it is far too early for many investors to consider them plays on the transition theme: our analysis shows that the oil majors lag at least a decade behind utilities and autos on relative exposure to clean energy," Gray writes.

#3. ConocoPhillips

ConocoPhillips (NYSE:COP) is expected to report earnings on 3rd August, 2021, before market open. The report will be for the fiscal quarter ending June 2021. 

COP has a consensus EPS forecast of $1.10, a huge improvement over $-0.92 reported for last year's corresponding period, while revenue is expected to clock in at $10.21B. COP has beat earnings estimates for two straight quarters.

Last quarter, Bank of America upgraded COP shares to Buy from Neutral with a $67 price target, calling the company a "cash machine" with the potential for accelerated returns.

According to BofA analyst Doug Leggate, Conoco looks "poised to accelerate cash returns at an earlier and more significant pace than any 'pure-play' E&P or oil major." 

Leggate COP shares have pulled back to more attractive levels "but with a different macro outlook from when [Brent] oil peaked close to $70."

But best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery.

But BofA is not the only Wall Street punter that's gushing about COP.

In a note to clients, Raymond James says the company's stock price is undervaluing the flood of cash the oil and gas company is poised to generate.

Earnings and revenue estimates for the other four members of the supermajors are as follows:

  • Royal Dutch Shell (NYSE:RDS.A) is expected to report earnings on 29th July, 2021, before market open. The report will be for the fiscal quarter ending June 2021. Shell has a consensus EPS forecast for the quarter of $1.16 and a revenue consensus of $57.97B.
  • BP Plc. (NYSE:BP) will report second-quarter earnings on 3rd August, 2021, before market open. The report will be for the fiscal quarter ending Jun 2021. BP has a consensus EPS forecast for the quarter  $of 0.59 with a consensus revenue estimate of $38.26B.
  • TotalEnergies SE (NYSE:TTE) is expected to report earnings on 29th June, 2021. The French supermajor is expected to report EPS of $1.26 and revenue of $42.20B.
  • Eni S.p.A (NYSE:E) is expected to report second-quarter earnings on 3rd August, 2021. No EPS estimates are available for the Italian oil and gas giant though analysts have a consensus revenue estimate of $17.04B.

By Alex Kimani for Oilprice.com

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