Exxon-Mobil (NYSE:XOM) and Chevron (NYSE:CVX) reported their 2nd quarter ’16 financial results last Friday, and the results – particularly Exxon’s – took some of the shine off the forward estimates of the Energy sector, that were in fact looking quite good, as we headed into the 2nd half of 2016.
Q4 ’16’s Energy sector earnings growth had been looking pretty good week-after-week as I updated this blog each Saturday. Look at this attached spreadsheet: FC – EnergyEst8216PostExxon
The first block highlighted is the trend in 4th quarter, 2016 estimates: note the sharp drop in Q4 ’16’s growth between July 29th and Monday August 1 ’16.
As soon as Exxon’s numbers hit the wires Friday morning, July 29th, my first thought in terms of the sector earnings revisions was ‘This won’t be good” and that was an accurate, off-the-cuff assessment. After writing about Energy and Basic Materials on July 23rd, knowing Exxon and Chevron were poised to report their Q2’s I was convinced the Energy sector would continue to outperform into the back half of 2016.
While there is a little more anxiety over the sector given the trend in crude oil and Exxon’s and Chevron’s numbers, note the bottom half of the above-linked spreadsheet. Exxon’s numbers and expected growth in 2017 didn’t budge at all with last Friday’s huge miss.
The other aspect to the Exxon forward estimates is that forward revenue growth is improving far faster than EPS. Exxon’s 2016 revenue growth – despite last Friday’s horrid miss – is still showing steady improvement.
Here is the recent Energy sector revenue growth history:
- Q2 ’16: -24.7% (as of 8/1/16)
- Q1 ’16: -29.6%
- Q4 ’15: -35.4%
- Q3 ’15: -35.9%
- Q2 ’15: -31.7%
- Q1 ’15: -34.7%
- Q4 ’14: -13.5%
- Q3 ’14: -2.6%
- Q2 ’14: +3.3%
The bottom sure looks to be in for the Energy sector in terms of the deteriorating revenue growth rate.
Conclusion: Remember, there is a difference between the commodity crude oil, and the Energy stocks. The PROJECTED revenue and EPS growth, even if it is just half of what is expected, is still a healthy rate of growth.
What makes me nervous ? Gasoline consumption drives about half the demand for US crude oil distillation. Electric cars, better mileage, aluminum trucks, etc. etc. all are poised to reduce the demand for gasoline over the next 5, 10, 20 years.
Exxon, Chevron, Schlumberger NV (NYSE:SLB), and Halliburton (NYSE:HAL) are the lion’s share of the Energy sector’s revenue and EPS. All these stocks remain above their 200-day moving averages and the technicals have improved nicely since the Q1 ’16 bottom. (Long XLE, IYE, OIH for clients, with a small position in XOM directly.)
The sentiment around the sector is pretty uniformly bearish, with the July drop in crude oil. My plan is to hold the above ETFs into 2017 and evaluate the earnings results each quarter. However the positions can change at any time.