Energy ETFs Likely To Underperform Again In Q3 Earnings?

The energy sector remains the biggest drag on the overall earnings picture with an expected Q3 earnings decline of 79% from the same period last year on 12.2% lower revenues, as per the latest Earnings Trends. However, it is better than Q2 earnings and revenue decline of 79% and 24.4%, respectively.

Earnings results from the world’s two largest oilfield services provider – Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) – sent mixed signals in the industry last week. Though both topped our earnings estimate and missed on the top line, they behaved differently. Shares of SLB dropped 3% while HAL climbed 4.2% following the earnings announcement (read: What Do Q3 Earnings Say About Oil Service ETFs?)

This put the spotlight on the broad energy ETFs that have substantial allocation to these oilfield services giants and the three big U.S. oil companies – Exxon Mobil (NYSE:XOM) , Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) – that are slated to release their earnings reports this week. These funds include Energy Select Sector SPDR XLE,Vanguard Energy ETF (NYSE:XLE) VDE,iShares U.S. Energy ETF IYE and Fidelity MSCI Energy Index ETF FENY.

Investors should note that these four companies dominate the funds’ portfolio and drive their performances. This is because these firms collectively make up for 40.4% for IYE, 39.5% for FENY, 36.9% for VDE, and 34.2% for XLE.

Given this, let’s delve into the earnings picture of the three oil biggies that have the power to move the funds up or down in the coming days (see: all the energy ETFs here):

What’s in the Cards?

Exxon Mobil is slated to release earnings before the market opens on October 28. The stock saw a negative earnings estimate revision of 25 cents over the past 90 days for the yet-to-be-reported quarter, representing negative year-over-year growth of 41.1%. It has a Zacks Rank #3 (Hold) and an Earnings ESP of 0.00%, which makes surprise prediction difficult. According to the our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 or 3 when combined with a positive Earnings ESP has chances of an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided. (Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises)

However, the largest U.S. oil company delivered positive earnings surprises in three of the last four quarters, with an average beat of 8.95%. The stock has an unfavorable Value, Growth and Momentum Style Score of C, F and F, respectively.

Chevron, which trails Exxon Mobil, has a Zacks Rank #2 (Buy) and an Earnings ESP of 0.00%. It delivered average negative earnings surprises of 50.30% in the last four quarters. The stock witnessed a negative earnings estimate revision of 32 cents over the past 90 days for the yet-to-be-reported quarter and is expected to see a massive earnings decline of 63.1% year over year. Further, the stock has an unfavorable Value Style Score of C, though a Growth and Momentum Style Score of B each looks impressive. The company is expected to report after the opening bell on October 28 (read: OPEC Surprises With Production Cut: Energy ETFs Soar).

ConocoPhillips has a Zacks Rank #4 (Sell) and an Earnings ESP of +3.08%. The earnings surprise track over the past four quarters is not good, with a negative average surprise of 14.21%. Like its peers, ConocoPhillips also witnessed a negative earnings estimate revision with the Zacks Consensus Estimate for third-quarter 2016 deteriorating from a loss of 28 to a loss of 65 cents over the past three months. It represents a substantial earnings decline of 71.05% from the year-ago quarter. The stock has an unfavorable Value, Growth and Momentum Style Score of F each. The company will report before the opening bell on October 27.

Conclusion

Though the recent rebound in oil prices has brought in gains for the above-mentioned ETFs from a year-to-date look, XLE and FENY have a miserable ETF Rank of 5 or ’Strong Sell’ rating, suggesting their underperformance in the coming days. Meanwhile, VDE and IYE have a Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting that the worst might be over for the space and that these could rebound in the near term if fundamentals remain strong and oil price continue to move up (read: How to Trade the Oil Rush with ETFs).

Further, Exxon and Chevron also have a favorable Zacks Rank though earnings surprises are not in the cards, indicating recovering fundamentals.

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