When considered on a year on year basis, this has been a remarkable earnings season so far for the energy sector, with a market leading 89.1 percent EPS growth rate. Investors who saw that coming, however, have not necessarily made boatloads of money, as many stocks in the sector have not responded positively to their own reports, which of course raises the question why. As always there is not one simple answer. There are a number of factors that have caused some stocks to react to earnings disappointingly, and as we sort through them it seems that there are two main lessons to be learned.
1. Expectations Matter
It doesn’t take a genius chart reader to look at a one-year chart of oil prices and conclude that this year’s calendar Q1 results were going to be significantly better than last years. In the first three months of 2017, WTI averaged around $50 per barrel and was coming off an extended period in the $40s that scared the pants off the industry. On the other hand, Q1 2018 saw prices holding above $60 and continuing to climb after a strong run up in the second half of last year.
Wall Street analysts, after extensive research to justify their big salaries, concluded that as a result, earnings would be good.
They raised their EPS forecasts significantly, and the price of most oil stocks went with them. Even companies that had disappointed last month saw their stock benefit from that. Exxon Mobil (XOM), for example, jumped over 10% in the…