Is the Energy Sector Running on Fumes?

Written by: Gary AshtonAmerica’s largest oil companies report 4Q19 earnings this week. Chevron Corporation (NYSE: CVX) and Exxon Mobil Corporation (NYSE: XOM) report numbers before the market open on January 31st. Even though both companies operate in the same sector, Wall Street analysts’ expectations could not be more different.Finscreener.com’s earnings rating for Chevron is a “Buy,” while for Exxon, it is a “Strong Sell.” Furthermore, Exxon’s earnings expectations have been revised down by a full 25% in the last 90 days.The bearish outlook for Exxon seems particularly harsh, considering the company delivered an earnings surprise of 6.25% in 3Q19 with earnings per share of $0.68. But 4Q19 is a different story with analysts forecasting earnings of just $0.47 per share compared to $1.51 in the same quarter last year, 4Q18. The stock has taken a bit of a bruising in 2020 as well, down 6.5% so far this year.Chevron also reports 4Q19 earnings before the open on the last day of January, but analysts seem more positive about this name, expecting $1.44 per share, which is only 4% lower compared to expectations 90-days ago. Chevron also had an 8.2% earnings surprise in 3Q19. Investors will be keenly watching to see if the company can beat analysts’ expectations this time around but are probably not expecting the company to perform as well as it did in 4Q18 when it reported EPS of $2.06.

Energy Not in Fashion

The energy sector, in general, is not a favorite for investorsright now. For example, the Energy Select Sector SPDR Fund (AMEX: XLE) is down a little over 10% in the last year compared to a 23.67% gain for the broader S&P 500 stock index (see chart). In fact, Energy is the worst-performing sector in the S&P 500 index in the last 12-month period.XLE Stock ChartSome analysts put this down to oil companies suffering from rising costs and shrinking margins. Oil prices have held up well-considering supplies that are broadly outpacing demand. OPEC+ is doing what it can to resolve this problem and announced in December 2019 that it had reached an agreement to deepen production cuts through March 2020. The group now targets production that is 1.7 million barrels per day lower than it was in October 2018, an increase of 0.5 million barrels per day from the previous target.

Robust Oil Prices

In the U.S. Energy Information Administration’s (EIA) January Short-Term Energy Outlook (STEO), they forecast that the Brent crude oil spot price will average $65 per barrel in 2020 and $68 in 2021. These robust oil prices are a far cry from the approximately $20 per barrel that tends to crush oil companies and force them into bankruptcy but is also some distance from the heady days of $100 per barrel oil when production costs were irrelevant, and investment returns were fantastic.

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