Back In Black: S&P 500’s Busiest Week Of Q1 2015 Ends Positively

The corporate earnings picture was bright for the week ended May 1 as 159 of the S&P 500 companies reported results. Of those 159, two-thirds saw results that came in ahead of Q1 estimates. As a result, the benchmark index saw earnings growth expectations for the first quarter of 2015 cross into the black, and is now expected to grow 2.0% from the prior year. This is a substantial improvement from the previous week when earnings were expected to decline 2.3% — and that would have been the first negative growth rate since Q3 2009.

EXHIBIT 2A. S&P 500: Q1 2015 EARNINGS VS. EXPECTATIONS – COS REPORTING APRIL 27 – MAY 1

Source: I/B/E/S data

Powering up

Not only was this the busiest week for S&P 500 reporting, but also the most important because results from the energy sector could change the outlook for the index. Fortunately, analysts severely underestimated the sector’s ability to generate earnings this quarter. All 14 of the companies within the sector that reported the week ending May 1 beat earnings estimates and ten reported double digit earnings surprise percentages. This helped to bring overall earnings for the sector in 31.8% above estimates.

As a result the energy sector’s earnings growth expectations for Q1 2015 improved 9.7 percentage points from the prior week, and are now expected to decline 54.5%. While this large improvement was a major contributor to the index turning positive, the sector is still a major drag on the S&P 500. When the energy sector is excluded, the S&P 500’s Q1 2015 earnings growth expectations increase to 9.7% from 2.0% when they are included.

The revenue picture for the energy sector was not as glamorous. Of the 14 sector constituents that reported in the week ending May 1, only eight beat Q1 2015 revenue estimates. Results for the quarter have come in 8.9% higher than expected and the sector is now expected to decline 33.6% from Q1 2014, a 4.1 percentage point improvement from the prior week. One of the reasons for the discrepancy in performance between earnings and revenue results vs. estimates for the energy sector has to do with efficiency improvements.

In comparison to expectations, both of the heavy hitters within the energy sector, Exxon Mobil Corp. (XOM.N) and Chevron Corp. (XOM.N), knocked earnings and revenue results out of the park. Chevron reported Q1 2015 earnings of $1.37 per share for a surprise of 73.4%, and revenue of $34.6 billion, 41.8% above estimates. Exxon reported earnings of $1.17 per share compared to the mean estimate of $0.83 per share, and revenue of $67.6 billion for a surprise of 32.0%.

Looking for the light

There were a few additional positive surprises as well. Given the overall concern for U.S. multinationals in regard to the strong dollar, Chevron’s $580 million benefit in the quarter as a result of foreign currency exchange rates was an unexpected gain. However, it should be noted that this is mostly due to balance sheet translation and won’t have a substantial impact to cash. Additionally, Exxon increased its dividend by 5.3% to $0.73 per share.

The two Integrated Oil & Gas sub-industry companies saw benefits to their downstream businesses due to stronger worldwide refining and marketing margins, but had severe declines in upstream as a result of substantial declines in crude. Both companies shared two common themes with the sector: an emphasis on expectations for increased production to continue and implementation of cost saving measures. Chevron expects to save $35 billion this year, while Exxon has signaled a target of $34 billion. Analysts estimate 2015 full year total production per day in barrels or equivalent (BOE) will rise 4.4% from the prior year to 4,144.60 for Exxon and 3.5% to 2,660 for Chevron.

Integrated Oil & Gas wasn’t the only big winner. CONSOL Energy Inc.’s (CNX.N) earnings of $0.37 per share led to a surprise of 184.6%, which was the largest of any constituent within the index. While this was a great surprise, low coal prices fueled by cheap natural gas continue to be an issue and earnings for the quarter were down 26% from the prior year. Revenue slightly topped estimates by 0.3% at $890 million, down 8% from Q1 2014. Better margins on coal helped CONSOL’s earnings, but the big boost came from a negative 48% effective tax rate related to the percentage depletion of its coal operations. Looking forward, commodity pricing for coal is expected to remain a challenge. Jim Grech, Chief Commercial Officer for CONSOL Energy, said during the April 28 conference call, “For 2015 right now, we see the current markets since the beginning of the year as being — and I’ll call it the spot markets — as being relatively weak and it’s led to us taking advantage of the assets we have and the strength we have to go to the export market. And we see that weakness continuing here through the second quarter, summer, and as we get to later in the year, there is some potential for some change. We have some indications of some spot coal, and we’ve made some small sales a little further out in a year. But the weakness that we’ve seen through the first quarter we expect to continue through the second quarter, and with some potential for some changes we get to later in the year are going to be highly dependent on weather and gas prices.”

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