]The energy sector has enjoyed bumper profits in the current year, with Big Oil companies setting records right, left and center. ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Shell (NYSE: SHEL) together brought in $46 billion in earnings in the second quarter, with all three setting new records for quarterly earnings. However, the outlook going forward is not quite as rosy.
It’s early innings into the earnings season, with just 7% of S&P 500 companies having reported third-quarter 2022 earnings. Unlike the first two quarters of the year, the current one is shaping up as another disappointing show despite 69% of S&P 500 companies having reported a positive EPS surprise and 67% having reported a positive revenue surprise.
According to the latest FactSet earnings insight report, the blended earnings growth rate for the S&P 500 is expected to clock in at a measly 1.6%, marking the lowest earnings growth rate reported by the index since Q3 2020 (-5.7%).
At least nine sectors, including energy, have downgraded their earnings expectations for the quarter, an indication of a deteriorating macro-economic outlook. Indeed, FactSet says that downward revisions to revenue estimates for companies in the Energy sector have been a substantial contributor to the decline in the overall revenue growth rate for the S&P 500.
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Still, the Energy sector is expected to report the highest earnings growth of all eleven sectors at 119.4%. Higher year-over-year oil prices are contributing to the year-over-year improvement in earnings for this sector, as the average price of oil in Q3 2022 ($91.43) was 30% above the average price for oil in Q3 2021 ($70.52). At the sub-industry level, all five sub-industries in the sector are expected to report a year-over-year increase in earnings of more than 20%:
- Oil & Gas Refining & Marketing (273%)
- Oil & Gas Exploration & Production (116%)
- Integrated Oil & Gas (106%),
- Oil & Gas Equipment & Services (73%)
- Oil & Gas Storage & Transportation (23%).
The Energy sector is also poised to be the top contributor to S&P 500 earnings growth for the third quarter in a row. If this sector were excluded, the index would be expected to report a decline in earnings of 4.9% rather than growth in earnings of 1.6%.
Big Oil Earnings
On a company level, several Big Oil companies are expected to return their Q3 2022 scorecards in the coming weeks.
Exxon Mobil Corporation is expected to report earnings on 10/28/2022 before the market opens. The report will be for the fiscal Quarter ending Sep 2022. According to Zacks Investment Research, based on 9 analysts' forecasts, the consensus EPS forecast for the quarter is $3.59, a big improvement compared to $1.58 posted for last year’s corresponding period.
Chevron Corporation is expected to report earnings on 10/28/2022 before the market opens. The report will be for the fiscal Quarter ending Sep 2022. According to Zacks Investment Research, based on 8 analysts' forecasts, the consensus EPS forecast for the quarter is $5.06 vs. $2.96 for Q3 2021.
ConocoPhillips (NYSE: COP) is expected* to report earnings on 11/03/2022 before the market opens. The report will be for the fiscal Quarter ending Sep 2022. According to Zacks Investment Research, based on 7 analysts' forecasts, the consensus EPS forecast for the quarter is $3.74 vs. $1.77 for Q3 2021.
BP Plc. (NYSE: BP) is expected to report earnings on 11/01/2022 before the market opens. The report will be for the fiscal Quarter ending Sep 2022. According to Zacks Investment Research, based on 4 analysts' forecasts, the consensus EPS forecast for the quarter is $2.13 vs. $0.99 for Q3 2021.
Royal Dutch Shell Plc. (NYSE: SHEL) is estimated to report earnings on 10/27/2022. According to Zacks Investment Research, based on 3 analysts' forecasts, the consensus EPS forecast for the quarter is $3.18. The reported EPS for the same quarter last year was $1.06.
TotalEnergies SE (NYSE: TTE) is estimated to report earnings on 10/27/2022. According to Zacks Investment Research, based on 3 analysts' forecasts, the consensus EPS forecast for the quarter is $4.27 compared to $1.76 for Q3 2021.
Energy Sector Earnings Set To Ease In 2023, but Watch OFS
Unfortunately, slowing growth is expected to remain the main theme in the coming year. In a recent Moody's research report, analysts say they have changed their outlook for the Global Energy sector to stable from positive.
According to the report, industry earnings will stabilize overall in 2023, but remain below levels reached by recent peaks. The analysts note that commodity prices have declined from very high levels earlier in 2022, but have predicted that prices are likely to remain cyclically strong through 2023. This, combined with modest growth in volumes, will support strong cash flow generation for oil and gas producers.
Moody’s estimates that the U.S. energy sector’s EBITDA for 2022 will clock in at $$623B but fall to $585B in 2023. The analysts say that low capex, rising uncertainty about the expansion of future supplies and high geopolitical risk premium will, however, continue to support cyclically high oil prices. Meanwhile, strong export demand for U.S. LNG will continue supporting high natural gas prices.
One particular standout from that report is how bullish the analysts are about the Oil Field Services (OFS) sector.
“Rising demand for oilfield services (OFS) amid some growth in drilling and completion activity will continue to boost pricing power and will support material growth in earnings for OFS companies,” the analysts wrote.
While discipline will still be the name of the game with regard to capacity, Moodys says pricing power will continue to strengthen next year, “allowing OFS companies to expand profit margins, even with labor and materials cost inflation”.
Moodys also expects improved profit margins for OFS from increasing day rates for onshore and offshore rigs, as well as higher future rates as customers renew contracts.
U.S. rigs are up by some 30% since January, and recovering to around 95% of their January 2020 levels, according to the report.
OFS companies have been reporting that drilling and well completion activity as well as pricing have been edging higher, while roughnecks are also saying they are seeing an increase in job offers. Oilfield workers were some of the hardest hit demographic by the Covid-19 pandemic in 2020. Nationally, the oil and gas industry is estimated to have lost 107,000 jobs as per global consulting firm Deloitte, with an estimated 200,000 roughnecks losing their jobs at the height of the global lockdowns.
By Alex Kimani for Oilprice.com
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