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Where To Look For Value This Earnings Season

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It’s that time again! A few weeks after the end of each calendar quarter-year, we enter what is known as earnings season, when quarterly results for corporations come thick and fast. As much as we like to kid ourselves that there is some hidden driver of stock prices that only we know, the reality is that they are simply a reflection of the past and expected future profitability of companies, which is what makes this time so important. Big energy companies usually release their results late in the season, which makes now a good time to look ahead at what to expect over the next couple of weeks.

Although the likes of Exxon (XOM) and Chevron (CVX) have yet to report, there was one energy sector earnings release this morning, and it is one that often gives clues as to what to expect. Schlumberger (SLB) reported earnings and revenue that were just about dead in line with expectations, so told us nothing really. The interesting information, however, came in their outlook. While the Houston-based oilfield services company said that U.S. shale oil had returned to a growth area there was weakness elsewhere, particularly in the Gulf of Mexico.

The immediate and obvious conclusion is that that is bad news with regard to the oil earnings to come, but that is not the case. The move away from deep water drilling and towards fracking shale rock in the U.S. has been well documented for some time. It should therefore come as no surprise to anyone that the recovery in operations is focused on shale, and the relative simplicity of land rather than marine drilling may be bad for SLB, but it is potentially a boon to integrated and E&P companies.

From the perspective of long-term significance for the industry, you should be following the results for those large integrated firms over the next couple of weeks, regardless of where your energy sector investments lie right now. Their capex plans and forward guidance give, in many ways, the best indication of the thinking of the industry and should be watched closely, but the historical numbers will also be revealing.

(Click to enlarge)

As you can see from the chart above for the E-Mini futures contract (QM), WTI spent the last quarter rising from a starting point in the mid-40s and averages well into the high 40s during that time. That is a better pricing environment than the industry has seen for some time, so how that translates into profitability is a vital question. If the big boys can’t demonstrate significant growth and meet or exceed expectations for a quarter with rising oil prices nudging $50, then the problems presumably run deeper than most assume.

That could well be the story in some cases. Not all integrated firms are created equal, and despite the oil price gains, a company like Total (TOT), who report a week from today, could disappoint. Their operations tilt more towards refining than many of their competitors and steadily rising oil prices do not benefit that side of the business. In addition, their E&P operations are more focused on the Middle East than some and continued strife in the region therefore will have an impact.

Chevron (CVX), on the other hand, who are more U.S. focused and one of the leading shale producers could easily exceed the expectations for EPS of $1 when they report on the same day. The whisper number (the rumored result amongst traders) is certainly higher, with many talking of EPS around $1.10. In fact, a beat of even that would come as no surprise in this case.

Next Friday will be a big day for energy earnings, as in addition to TOT and CVX, Exxon (XOM) will also release their Q3 results. They are expected to show good year on year EPS growth to $0.85, but I for one will be paying less attention to Exxon’s revenue and profit numbers than I will to any announcement regarding their dividend. So far, through all the turmoil of the last few years, XOM have continued to gradually increase their payout to shareholders and given that the yield is such an important factor in the stock’s pricing, an indication that that looks like continuing could be seen as a positive, even if actual earnings aren’t great.

As energy earnings get underway in earnest there will be plenty of things to watch. SLB this morning offered no great surprises, but it is a sure bet that there will be some over the next couple of weeks. Surprises create volatility, which in turn creates opportunities for profit, and earnings season is a time full of them.

Have fun!

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