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Will Big Oil See Better Earnings In Q2?

We are nearly halfway through the earnings season, with 46% of S&P 500 companies having returned their first quarter scorecards. According to FactSet data, 77% of S&P 500 companies have exceeded earnings expectations while 60% have reported a positive revenue surprise.

Unfortunately, the energy sector has underperformed the market, thanks in large part to lower oil and gas prices.

The Energy sector is reporting the second-largest (year-over-year) earnings decline of all 11 market sectors at -25.5% while Q1 2024 revenue growth of -3.5% is the third lowest. At the sub-industry level, four of the five sub-industries in the sector are reporting a year-over-year decrease in earnings: Oil & Gas Refining & Marketing (-61%), Integrated Oil & Gas (-27%), Oil & Gas Exploration & Production (-9%), and Oil & Gas Storage & Transportation (-3%). On the other hand, the Oil & Gas Equipment & Services (19%) sub-industry is the only sub-industry in the sector reporting year-over-year earnings growth.

Big Oil companies have reported mostly mixed Q1 results with lower gas prices and narrowing refining margins taking a toll on profits.

Exxon Mobil Corp. (NYSE:XOM) reported Q1 Non-GAAP EPS of $2.06, $0.12 below the Wall Street consensus while revenue of $83.08B (-4.0% Y/Y) beat by $1.57B. Exxon’s GAAP earnings of $8.22B ($2.06 per share) marked a big 22% Y/Y decline as industry refining margins and natural gas prices retreated from last year's highs to trade within the ten-year historical range. The company, however, continues to be a cash-cow, generating strong cash flows from operations of $14.7 billion and free cash flow of $10.1 billion in the first quarter. Exxon announced shareholder distributions of $6.8 billion in the quarter, including $3.8 billion of dividends and $3.0 billion of share repurchases.

Exxon’s Guyana project continues to be a success story, with the company achieving quarterly gross production of more than 600,000 oil-equivalent barrels per day and also reached a final investment decision (FID) on the sixth major development. The company’s net production in the first quarter clocked in at 3.8 million oil-equivalent barrels per day, a decrease of 40,000 oil-equivalent barrels per day compared to the fourth quarter but an increase of 57,000 oil-equivalent barrels per day excluding divestments, entitlements and government-mandated curtailments.

During the company’s earnings call, Exxon Mobil CEO Darren Woods reiterated that he's not interested in acquiring Hess Corp. (NYSE:HES) as the oil giant is currently embroiled in an arbitration case with Chevron Corp. (NYSE:CVX) over a massive oil block off the coast of Guyana.

"I've made it clear in the past that this is not a play for Hess," We are not interested in a transaction on Hess. This is really about protecting the value that we've created as part of that development. Making sure that the preemption rights that we believe exist in the JOA are recognized and confirmed and then understand what the value of the asset is and then what the options are to maximize that value to shareholders," Woods said in a CNBC interview earlier on Friday. "

In a separate interview, Chevron CEO Mike Wirth also told CNBC that the company won't be able to complete its $53B acquisition of Hess if it loses the arbitration case.

"If an arbitration judgement in the event were to go against Hess's interpretation of the contract, and we feel very confident that their interpretation is the correct one, then that condition wouldn't be satisfied, and then the transaction would not close."
Similar to its bigger peer, Chevron reported mixed results with Q1 Non-GAAP EPS of $2.93 beating by $0.03 while revenue of $48.72B (-4.1% Y/Y) missed by $1.99B. Total earnings in the first quarter clocked in at $5.5B ($2.97 per share), good for a 16% Y/Y drop. Chevron returned $6.0 billion of cash to shareholders during the quarter, including dividends of $3.0 billion and share repurchases of nearly $3.0 billion.

The company reported that worldwide production was up 12 percent from a year ago primarily due to the acquisition of PDC Energy, as well as strong operational performance in the Permian and DJ Basins in the U.S. Chevron reported that U.S. net-oil production jumped 35% to 406,000 barrels per day.

Meanwhile, Hess Corp returned a healthy Q1 report, with GAAP EPS of $3.16 beating by $1.50 while Q1 revenue of $3.31B (+35.1% Y/Y) beat by $160M. Indeed, Fact Set has reported that Hess has, so far, reported the third-largest earnings beat. Net income came in at $972 million, or $3.16 per share, compared with net income of $346 million, or $1.13 per share, in the first quarter of 2023.

The company’s oil and gas net production clocked in at 476,000 barrels of oil equivalent per day (boepd), up 27% from 374,000 boepd in the first quarter of 2023 with Guyana net production of 190,000 bopd good for a 70% Y/Y increase. The company’s production is set to keep growing after it sanctioned the development of Whiptail in offshore Guyana. The new block is expected to add gross production capacity of approximately 250,000 barrels of oil per day (bopd) by the end of 2027.

Energy Sector Outlook

Oil and gas companies could see a rebound in the current quarter, with FactSet predicting Q2 earnings growth of 15.7%, 3rd highest in the S&P 500 while Q2 revenue growth of 4.0% will be the market’s 6th highest.

Unfortunately for the bulls, the rebound will probably only be short-lived.

FactSet has predicted earnings growth of -3.0% for the energy sector in CY 2024 while revenue is expected to grow -0.4%. The sector’s earnings are likely to improve in the coming year, with FactSet predicting 8.2% growth in CY 2025 while revenue is seen growing 1.2%.

However, energy’s growth rates in both years will come in below market averages with S&P 500 earnings predicted to expand 10.8% in CY 2024 and 13.9% in CY 2025 while revenue is expected to grow 4.9% in CY 2024 and 5.8% in CY 2025.

By Alex Kimani for