September 25, 2019

Earnings Roundup: Has A New Trend Emerged Within Energy?

by David Aurelio.

A clear trend has emerged within the energy sector, consistent negative earnings and revenue forecasts for the S&P 500’s oil & gas exploration & production (E&P) sub-industry. The group continues to face a weak pricing environment and is expected to stop the exponential production growth.

Exhibit 1: S&P 500 E&P YoY Growth Rates vs. Net Profit Margin

Analyst estimates for E&P’s 19Q3 aggregated earnings have fallen 20.1% since July 1 and revenue expectations have come down 9.0%. As a result, the outlook for 19Q3 YoY earnings are down 15.1 percentage points (ppts) to a decline of 39.5% and revenue fell 8.4 ppts to 13.4%. In the third quarter, analysts anticipate a 14.0% increase in lease operating expenses (a key performance indicator for the industry) and for net profit margins to contract 4.86 ppts to 11.8%.

Exhibit 2: EPS Estimates for the Top Six Weighted S&P 500 E&P

While the magnitudes of the downward revisions to earnings and revenue estimates are noteworthy, the consistency across upcoming quarters and all 12 constituents is striking. It shows that analyst sentiment is clearly bearish. In fact, E&P scores a 12 on StarMine’s Analyst Revisions Model (ARM) from Refinitiv. ARM measures analyst sentiment on a scale of 1 to 100, with 1 being the most bearish. When used in the aggregate setting, a 12 is an extremely bearish score. You can find out more about ARM here: http://bit.ly/StarMineQuant.

Exhibit 3: U.S. Driving Trends vs. U.S Crude Oil Production and WTI Spot

Potentially a victim of its own success, the advancements in hydraulic fracking exponentially increased U.S. production at a time when vehicles were becoming more fuel efficient and while total miles driven in the U.S. was growing at a slow pace. To visualize this, we can roughly approximate this and divide the total miles driven per year by average miles per gallon (MPG) to get the average gallons per year (right hand scale). This shows that the average gallons per year peaked around 2004. The lower chart, within Exhibit 3, shows that U.S. oil production bottomed in 2008 and then experienced a period of exponential growth.

Exhibit: 4: WTI Crude Spot vs. U.S. Crude Inventories

With WTI crude continuing to remain under pressure and inventories up from the prior year, analysts expect to see a shift in production to modest to flat growth. As a result, YoY CapEx is expected to decrease 8.5% in 19Q3 (as seen in Exhibit 1), volume is expected to slow, which analysts anticipate will lead to a decrease in revenue (-13.4%).

The attacks on Saudi Arabia could provide a potential positive catalyst for the group that has seen so much negative sentiment ahead of third quarter earnings. However, the mild reactions to the events are a testament to just how much the industry dynamics have changed in the past several years and highlight the U.S.’s shift towards energy independence.

Additional S&P 500 earnings information can be found in This Week in Earnings

Eikon from Refinitiv is a complete solution for research and analytics. It places the most comprehensive market information, news, analytics and trading tools available into a desktop as simple to use as the Internet. Eikon from Refinitiv clients can run fundamental and technical screens against a global dataset representing more than 100 countries and over 200,000 securities.

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