Optimism Gushes Forth: Oil's Q1 Earnings Roundup

Energy companies reported earnings in droves last week, and the results were fairly encouraging.

Where did the strength lie?

Higher oil prices vis-à-vis the year-ago quarter helped in part, while the prudence these companies have been exercising in conserving cash and reining in costs are also responsible for the upside.

The S&P 500 Energy (Sector) advanced about 24 percent in 2016, although it has lost 12 percent in the year-to-date period. Will the earnings momentum help to reignite the rally in the space?

Oil Cools Off After Being On The Boil In 2016

To understand this, we may have to look at how oil prices have been behaving. In 2016, oil prices ran up 45 percent after being bearish in 2014 and 2015. With lower oil prices hurting revenues, most oil companies resorted to cost cuts to shore up their bottom line. Capital spending budgets were slashed ruthlessly, which helped these companies to preserve the cash flow and maintain their dividend payouts.

After the resurgence in 2016, which was facilitated by OPEC's production quota reduction and strengthening economic momentum, which is salubrious for the demand side of the equation, oil prices have begun to whimper.

Notwithstanding the decline seen in 2017, the end-of-the-quarter (first quarter of 2017) price represented a 32 percent increase from the year-ago period.

In the first quarter, oil prices lost about 5.8 percent to $50.60 a barrel and have fallen further subsequently and are currently trading around the $46 levels.

U.S. Oil Giants Thrive On Cost Cuts, Better Upstream Performance

Exxon Mobil Corporation XOM reported 30 percent revenue growth to $63.29 billion and net earnings more than doubled to $4.01 billion from $1.81 billion last year, with costs rising 22 percent.

The company cut its capital and exploration expenditure by 19 percent to $4.17 billion. Oil-equivalent production fell 4 percent to 4.2 million oil-equivalent barrels per day. Excluding entitlement effects and divestments, oil-equivalent production was down 1 percent.

Cash flow from operations improved to $8.9 billion from $5 billion in the year-ago quarter, suggesting the company has means to meet its capital spending and dividend payment.

The company's upstream business, which is exploration & production, performed well, with the non-U.S. segment contributing $2.27 billion to earnings. The downstream focused on refining and processing, and chemical businesses contributed $1.2 billion each to earnings.

The stock barely reacted to the earnings announcement, rising merely 0.5 percent.

Chevron Corporation CVX reversed to a profit of $2.68 billion or $1.41 per share from a loss of $725 million or $0.39 per share last year, beating the $0.86 per share consensus by a wide margin.

Revenues were up 41.9 to $33.42 billion versus the consensus estimate of $33.42 billion, outpacing the 20 percent increase in costs.

Segment-wise, the upstream business saw earnings of $1.52 billion compared to a loss of $1.50 billion last year and downstream saw a 26 percent increase in earnings to $926 million.

The company grew production by 3 percent and targets 4–9 percent increase for the full year.

Cash flow from operations improved to $3.88 billion from $1.14 billion and capital expenditure was reduced to $3.4 billion from $5.68 billion.

The stock rose 1.2 percent in reaction to the earnings.

Smaller brethren ConocoPhillips COP reported an adjusted loss of $0.14 per share compared to the break-even result the Street was forecasting. However, the loss narrowed notably from the $0.95 per share loss reported a year ago.

Revenues climbed 47 percent to $7.52 billion, with the average realized price improving to $36.18 from $22.94 in the year-ago quarter.

The company's cash flow from operations was at $1.8 billion. Production rose 2 percent to 1,584 million barrels of oil equivalents per day.

European Players Too Make Hay

BP plc (ADR) BP reported replacement cost profits of $1.4 billion in the first quarter, reversing from a $485 million loss last year. The improvement was attributed to the higher oil prices and production and the impact of cost cuts. Operating cash flow was at $4.4 billion.

The results came as pleasant surprise to investors, who were left worried by the company, when it said in February that oil prices need to rise to $60-a-barrel if it were to break even.

Royal Dutch Shell plc (ADR) (NYSE: RDS-A) said its profits on a cost of supplies basis rose to $3.8 billion from $1.6 billion a year earlier. Revenues increased to $71.8 billion from $70.63 billion.

Total SA (ADR) TOT's earnings rose 56 percent, with the improvement partly attributed to the higher oil prices versus a year ago. Free cash flow, excluding asset sales and acquisitions, was at $1.7 billion.

Way Forward

The Energy Information Administration predicts oil prices to average $54.2 in 2017 and $55.1 in 2018. Meanwhile, predicating on OPEC persisting with its production quota cut in the second half of the year, Citi analysts predict oil prices to move above $60 in the second half of the year, according to a CNBC report.

With the conducive pricing environment, the cushion offered by improving cash flow production and improving production, oil companies could see the revival continuing into the year.

For those interested in participating in a continued improvement in the fundamental picture of oil companies can look at the following ETFs:

• SPDR S&P Oil & Gas Explore & Prod. (ETF) XOP.
• iShares Dow Jones US Oil & Gas Exp.(ETF) IEO.
• Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH.

Related Links:

Alan Knuckman's Exxon Mobil Options Trade

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