The Fuse

Earnings Season Anticipates Mixed Results

by Alex Adams | @alexjhadams | July 29, 2019

Most of the major oil companies will report their quarterly earnings this week, amid a shifting landscape which sees companies negotiating a period of weaker prices, policies that could affect their bottom lines and a greater share of their portfolios in natural gas.

BP announced its earnings today, Shell is scheduled for Thursday and Chevron and Exxon are reporting on Friday. If the results of other large companies are to be taken as an indicator of these majors’ earnings, we can expect muted results in a difficult environment.

Total reported its earnings last week and announced profits that fell short of estimates due to falling oil and natural gas prices. Adjusted net income fell almost 20 percent compared to a year earlier. As other companies have expanded into natural gas to lower their carbon footprints and counter negative consumer sentiment, we can expect low natural gas prices to similarly affect their profitability.

Norway’s national oil company Equinor also missed analyst expectations in the second quarter due in part to lower oil liquids output and weaker natural gas prices. Adjusted earnings before interest and tax fell to $3.15 billion in the second quarter, falling short of the $3.4 billion anticipated by market watchers, and down from $4.3 billion during the same period last year.

However, BP managed to beat profit expectations after a strong rise in oil and gas production offset weaker crude prices. Reuters reported that underlying replacement cost profit, the company’s definition of net income, reached $2.8 billion in the second quarter, exceeding a company-provided forecast of $2.46 billion.

For Chevron and Exxon, difficult questions will have to be addressed in their earnings calls. Friday’s call will be the first for Chevron since failing to acquire Anadarko Petroleum, losing out in a battle with Occidental Petroleum to secure Anadarko’s prime Permian Basin real estate. The loss has prompted analysts to speculate that Chevron’s earnings call will be watched closely for any signs on future mergers and acquisitions strategy, even though the company usually keeps these calls strictly about their quarterly numbers.

Many industry watchers predict Chevron to perform better than its American counterpart, Exxon, given its greater free cash flow “and thus shareholder returns on a more conservative spending profile,” analysts at Tudor Pickering Holt said in a recent note reported by MarketWatch. Zacks Equity Research similarly predicts Chevron’s revenues to total $42.49 billion, up 0.6 percent from the same quarter the previous year, although their research also notes that analysts may “have recently become bearish on the company’s earnings prospects.”

Exxon will also have to prove to investors that it is over a difficult first quarter, due to weaker chemical and refining businesses. Earlier this month, Exxon stated in a securities filing that lower crude and natural gas prices would offset improvements in its refining operations: The company wrote that while higher crude prices may help increase profits by $400 million to $600 million, natural prices currently running at multi-year lows would neutralize those gains by an equal measure.

Although Big Oil enjoys greater insulation from volatile oil prices than their non-integrated exploration and production (E&P) counterparts, their downstream and international gas activities and an extended period of lower commodity prices will continue to weaken earnings outlooks. In turn, this will make the prospect of merging with—or acquiring—E&P companies more attractive.