uploads/2019/07/Ranks-F.jpg

Will XOM, CVX, Shell, and BP Be Able to Improve Earnings in Q2?

By

Updated

Integrated energy firms’ Q2 2019 estimates

Here we will rank integrated energy companies on their estimated year-over-year change in EPS in Q2 2019. We’ll look at ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP), the four leading firms.

Integrated energy companies are expected to post mixed performances in Q2 2019. While Shell, Chevron, and BP are expected to post a year-over-year rise in earnings, ExxonMobil is expected to post a fall in earnings. Shell is expected to see the highest increase of 12% YoY in Q2 earnings. However, ExxonMobil’s EPS are expected to fall by 3% YoY in Q2 2019. Chevron and BP’s profits are expected to rise by 7% YoY and 1% YoY, respectively, in Q2 2019. These companies are expected to post a mixed performance because of the likely fall in the upstream earnings but an anticipated rise in downstream earnings.

Upstream environment

Oil prices, in terms of quarterly average, stood lower year-over-year in Q2. WTI prices fell by 11.8% YoY to $59.9 per barrel in the second quarter. Similarly, Brent prices declined by 9.7% YoY to $68.5 per barrel in Q2 2019.

Lower prices could be partly offset by a rise in upstream volumes of these companies. In Q1 2019, while ExxonMobil, Chevron, and BP’s hydrocarbon production rose by 2.4% YoY, 6.5% YoY, and 2.0% YoY, Shell’s output declined by 2.3% YoY. ExxonMobil produced the highest quantity of hydrocarbon at 3.98 MMboed (million barrels of oil equivalent per day) in Q1 2019. Shell produced 3.75 MMboed. Chevron and BP stood closer at 3.04 MMboed and 2.66 MMboed of hydrocarbon production in Q1 2019.

Downstream conditions

The refining environment gave mixed cues in Q2. While the industry cracks rose, oil spreads narrowed year-over-year in the quarter. The US Gulf Coast WTI 3-2-1, the benchmark crack, rose by 9.1% YoY to $19.7 per barrel in the second quarter. However, the Canadian differential, WTI-WCS, declined by 30.4% YoY to $12.4 per barrel in the second quarter driven by supply constraints. Also, the Midland spread, WTI Cushing-WTI Midland, fell by 71.2% YoY to $2.3 per barrel in Q2 2019.

Valuations

ExxonMobil, which is expected to post a fall in earnings, trades at the highest valuation of 17.8x its forward PE. ExxonMobil is a financially sturdier company with lower debt and a decent liquidity position. In comparison, Shell, which is expected to post the highest rise in earnings, has the lowest valuation of 10.8x forward PE. Shell’s financials have strengthened. Plus, the company has a growing upstream portfolio.

Chevron and BP’s valuations stand at 17.6x and 11.3x, respectively. BP’s weaker valuations are mainly due to its relatively high debt (total debt to total capital ratio of 43%, which is highest among peers) partly offset by rising upstream output. In contrast, Chevron has the second-best debt position in the industry. Plus, the company has a strong upstream portfolio.

Shell to post highest rise in earnings in Q2 2019

Royal Dutch Shell (RDS.A) is forecasted to post a 12% YoY rise in EPS in its upcoming Q2 2019 earnings. The expected rise in Shell’s earnings is higher than BP (BP) and Chevron (CVX), which are expected to post 1% and 7% YoY rises in EPS, respectively, in Q2 2019. However, ExxonMobil’s (XOM) EPS are expected to fall by 3% YoY.

Q1 2019 performance

In Q1 2019, Shell’s revenues at $83.7 billion missed Wall Street analyst estimates. However, in the quarter, Shell’s adjusted EPS (earnings per ADS) stood at $1.30 compared to its estimated EPS of $1.05, surpassing the analysts’ estimate. But Shell’s first-quarter adjusted earnings per share fell by 2% year-over-year.

Shell’s reported earnings rose from $5.9 billion in Q1 2018 to $6.0 billion in Q1 2019. However, Shell’s adjusted earnings fell by 2% YoY to $5.4 billion in Q1 2019, which was led by an increase in corporate expenses driven by lower tax credits. However, earnings from all three business segments (Upstream, Integrated Gas, and Downstream) rose in the quarter, a favorable scenario. For more on first-quarter earnings, read Shell’s Q1 Earnings Beat Estimates, Segmental Earnings Rose.

Shell’s Q2 2019 estimates

Shell is expected to post EPS of $1.25 in Q2 2019, around 12% higher than its Q2 2018 adjusted EPS. However, Shell’s Q2 2019 estimated EPS is about 4% lower than its Q1 2019 adjusted EPS. Shell’s revenues are expected to be around $91.2 billion in Q2 2019, 6% lower than Q2 2018 revenues.

Shell’s upstream and integrated gas earnings are likely to be impacted by decreased oil and natural gas prices in Q2 2019 over Q2 2018. Prices of WTI (West Texas Intermediate) oil have fallen by 12% YoY to $60 per barrel in Q2 2019. Also, Henry Hub natural gas prices have fallen by 11% to $2.5 per MMBtu in Q2.

According to Shell’s guidance, its upstream production volumes are estimated to be higher by 150 to 200 Mboed (thousand barrels of oil equivalent per day) year-over-year in the second quarter, which would be led by new field ramp-ups, the transfer of its Salym asset to the Upstream segment, and lower maintenance activities partly offset by field declines and divestment. Higher upstream volumes could partially offset the impact of lower oil prices.

However, divestments and the transfer of assets from the integrated gas segment are expected to impact the segment’s volumes. Integrated gas output is expected to be lower by 10 to 50 Mboed YoY in Q2. LNG liquefication volumes are expected to be almost the same as the previous year.

Further, the downstream earnings are expected to rise due to higher refining cracks year-over-year partly offset by lower oil spreads in the second quarter. Plus, Shell’s refining throughput could be higher in the quarter because of lower maintenance activities.

Chevron’s earnings could rise more than BP’s in Q2

Chevron (CVX) is estimated to post a 7% YoY rise in earnings in the second quarter. The rise is more than that of BP (BP), whose EPS are expected to increase by 1% YoY to $0.86 per share. Relatively, Royal Dutch Shell (RDS.A) could post a higher rise of 12% YoY to $1.25 per share in Q2. But ExxonMobil’s (XOM) earnings are expected to fall by 3% YoY to $0.89 per share.

Chevron’s Q1 performance

In Q1 2019, Chevron’s revenues at $35.2 billion missed Wall Street analysts’ estimate. However, in the first quarter, Chevron’s adjusted EPS stood at $1.39, which surpassed Wall Street analysts’ estimated EPS of $1.30 by ~7%. However, Chevron’s adjusted EPS was about 27% lower than its adjusted EPS in Q1 2018.

Chevron’s adjusted earnings fell from $3.6 billion in Q1 2018 to $2.8 billion in Q1 2019. The YoY decline in profits was due to the fall in Upstream as well as Downstream earnings. Chevron’s adjusted Upstream earnings fell by 2% YoY to $3.3 billion in Q1. This was due to lower realizations partly offset by higher volumes. Chevron’s production rose by 7% YoY to 3.04 million barrels of oil equivalent per day in Q1 2019. Also, Chevron’s adjusted Downstream earnings fell from $0.7 billion in Q1 2018 to $0.2 billion in Q1 2019, which was mainly due to lower downstream and chemicals margins.

For more on Chevron’s first-quarter earnings, read Chevron Posts Dull Q1 Numbers, Upstream Earnings Fall.

Chevron’s Q2 2019 estimates

In Q2 2019, according to Wall Street analysts’ estimate, Chevron is expected to post EPS of $1.90, which is 7% higher than its adjusted Q2 2018 EPS and 37% higher than its Q1 2019 adjusted EPS. Chevron’s revenues are expected to be around $40.8 billion in Q2 2019, which is 3% lower than the Q2 2018 revenues.

Chevron’s upstream earnings could fall year-over-year in Q2. The crude oil prices fell yearly in the first quarter. WTI prices declined from $68 per barrel in Q2 2018 to $60 per barrel in Q2 2019, which could impact Chevron’s second-quarter realizations, which could lead to lower upstream earnings for the company. But lower realizations could be partly offset by higher upstream volumes. The company expects its total volumes to grow between 4% and 7% in 2019. Gorgon, Wheatstone, and Permian are expected to drive growth for the company.

Plus, downstream earnings are likely to be supported by higher refining cracks year-over-year in the first quarter. For example, the US Gulf Coast WTI 3-2-1 crack, the broader market crack indicator, widened by 9% over Q2 2018 to $20 per barrel in Q2 2019. However, lower oil spreads could impact the company’s downstream earnings.

BP’s EPS could rise in Q2, but ExxonMobil’s EPS could fall

BP’s (BP) EPS are expected to rise by 1% YoY in the second quarter. Though the rise is marginal, it’s better than the fall in ExxonMobil’s (XOM) EPS by 3% YoY in Q2. However, Royal Dutch Shell (RDS.A) and Chevron’s (CVX) earnings are expected to rise by 12% YoY and 7% YoY, respectively, which is more than BP’s. ExxonMobil, Shell, and Chevron’s EPS are expected to stand at $0.89, $1.25, and $1.90, respectively, in Q2 2019.

BP’s Q1 performance

BP’s first-quarter revenues stood at $66.3 billion, surpassing Wall Street analysts’ estimate by about 9%. Plus, BP’s adjusted EPS (earnings per ADS) stood at $0.70, which exceeded Wall Street analysts’ estimate of $0.67 by about 4% in Q1 2019. However, BP’s adjusted EPS fell by 10% YoY in the first quarter. For more, please read BP’s Q1 Upstream and Downstream Earnings Fell.

BP’s Q2 2019 estimates

According to Wall Street analysts, BP (BP) is expected to post EPS (earnings per ADS) of $0.86 in Q2 2019, which is 1% higher than its Q2 2018 adjusted EPS. Also, it is 23% higher than its Q1 2019 adjusted EPS. BP’s revenues are estimated to be around $71.5 billion in Q2 2019, about 5% lower than revenues in Q2 2018.

Upstream earnings expectations

A dollar per barrel fall in Brent price impacts BP’s pre-tax replacement cost operating profit by $340 million annually. In Q2 2019, the Brent price has fallen to an average of $69 per barrel compared to $75 per barrel in Q2 2018.

Further, per BP’s guidance, its hydrocarbon production is expected to stay flat quarter-over-quarter in the second quarter. This is because of ramp-ups of the major projects partly offset by maintenance activities in high margin areas.

BP produced 2.66 MMboed (million barrels of oil equivalent per day) of hydrocarbons in the first quarter. According to BP’s guidance, its production in Q2 2019 should be around 2.66 MMboepd, higher than 2.45 MMboepd in Q2 2018. Thus, BP’s output could rise year-over-year in the second quarter. In Q1 2019, BP’s upstream earnings could fall year-over-year led by possibly lower oil prices partially offset by likely higher volumes.

Downstream earnings expectations

BP’s downstream earnings could rise YoY in Q2 2019. This is because global refining marker margins (or RMM), which are refining margin indicators of areas where BP operates, rose yearly in Q2 2019. According to BP, a $1 per barrel change in its RMM, changes its pre-tax replacement cost operating profit by $500 million annually. BP’s RMM rose from $14.9 per barrel in Q2 2018 to $15.3 per barrel in Q2 2019.

XOM’s EPS to fall in Q2, but BP, Shell, and CVX’s EPS could rise

ExxonMobil (XOM) is expected to post a fall in earnings of about 3% YoY in Q2 2019. In comparison, Royal Dutch Shell (RDS.A), Chevron (CVX), and BP’s (BP) earnings are expected to rise by 12% YoY, 7% YoY, and 1% YoY, respectively, in the second quarter. Also, peer Suncor Energy’s (SU) earnings are expected to rise by 17% YoY in Q2 2019. Now, let’s look into ExxonMobil’s earnings estimate in more detail.

ExxonMobil’s Q1 2019 performance

In Q1 2019, ExxonMobil’s revenues at $63.6 billion missed Wall Street estimates by ~2%. Also, the company’s first-quarter EPS stood at $0.55, missing Wall Street analysts’ estimated EPS of $0.70 by about ~21%. Plus, ExxonMobil’s Q1 2019 EPS stood 50% lower than its EPS in Q1 2018.

ExxonMobil’s (XOM) earnings fell from $4.7 billion in Q1 2018 to $2.4 billion in Q1 2019. The fall in profits was due to an across-the-board fall in segmental earnings. ExxonMobil’s Upstream, Downstream, and Chemical earnings fell year-over-year in Q1 2019. For more on ExxonMobil’s first-quarter performance, please read ExxonMobil’s Upstream and Downstream Earnings Fell in Q1.

ExxonMobil’s Q2 2019 estimates

Wall Street analysts estimate that ExxonMobil could post EPS of $0.89 in Q2 2019, which is 3% lower than its Q2 2018 adjusted EPS but 62% higher than its adjusted EPS in Q1 2019. Also, ExxonMobil’s revenues are estimated to be around $66.9 billion in Q2 2019, about 9% lower than its Q2 2018 revenues.

Weaker oil prices could result in lower upstream earnings for the company in Q2 2019. Prices of Brent oil have fallen by 9% YoY to $69 per barrel in Q2 2019. According to ExxonMobil’s guidance, in Q2 2019, the company’s gas volumes could be lower due to seasonal demand. In Q1 2019, the company’s natural gas production fell by 1.1% due to a fall in the international areas led by lower demand, divestments, and natural declines. The company produced a total of 3.98 MMboed of hydrocarbons in the first quarter, which shows a 2.4% YoY increase driven by higher liquids output from the Permian region.

But downstream earnings could be higher due to the rise in refining cracks in the industry. USGC WTI 3-2-1, the benchmark crack, has risen by 9% YoY in Q2 2019. However, oil spreads like the Canadian differential and Midland spread have fallen by 30% YoY and 71% YoY to $12.4 per barrel and $2.3 per barrel, respectively, in Q2 2019. Thus, lower spreads could partly offset the effect of the higher refining crack. Also, ExxonMobil was expecting a high level of turnaround activities in the downstream segment in the second quarter.

How analysts rate Shell and Chevron ahead of earnings

Let’s review Wall Street analysts’ opinion of Royal Dutch Shell (RDS.A) and Chevron (CVX) before their second-quarter earnings. Shell and Chevron are covered by ten and 23 Wall Street analysts, respectively. Of these, 100% and 74% of analysts rated Shell and Chevron as “buy,” respectively.

100% of analysts rate Shell a “buy”

All the analysts that cover Shell have rated it a “buy.” Shell’s mean target price is $81 per share, which implies a ~24% gain from the current level. This is the highest implied gain compared to peers Chevron, BP (BP) and ExxonMobil (XOM). Implied gains in CVX, BP, and XOM stand at 11%, 19%, and 11%, respectively.

Shell’s first-quarter earnings declined marginally. However, the decline was the lowest compared to peers. Plus, Shell’s first-quarter earnings surpassed Wall Street analysts’ estimate. Also, the company’s Upstream, Integrated Gas, and Downstream earnings rose despite lower oil prices, narrower refining margins, and weaker chemical margins. The increase in earnings was due to the strength of the integrated earnings model build by the company over the years. Plus, Shell has restructured its assets to keep only competitive assets. The effect of the restructuring exercise was evident in its first-quarter earnings, where its segmental earnings rose despite harsh business conditions. Also, Shell’s strategy to reduce cost, optimize capex, sell non-core assets, and deliver new projects according to schedule and within budget have supported earnings.

For more on Shell, read Shell: Stronger in Q1 due to Its Strategy. The series talks about the improvement in Shell’s position due to its robust strategy, strong upstream portfolio, and critical downstream segment.

The majority of Chevron’s ratings are “buy”

Chevron posted lower earnings in the first quarter but continued to strengthen its financials and boost future growth. The company’s cash flow stood short in covering capex and dividends, but the shortfall was smaller than those of peers. Plus, Chevron’s debt position stood second-best among peers. In the first quarter, Chevron continued to return wealth to shareholders by paying $2.2 billion in dividends.

Further, in the quarter, Chevron’s total capital and exploratory spending stood at $4.7 billion in Q1 2019. Most of Chevron’s capex was towards its promising Upstream segment. The company has robust upstream assets, which is expected to drive volumes growth for the company. Plus, the advantaged downstream portfolio supports integrated earnings model. Chevron’s model is proficient in maintaining its earnings in a volatile oil price environment.

Overall, analysts have a favorable opinion on Chevron likely due to its financial strength, growing portfolios, and integrated earnings model.

Do analysts like BP and ExxonMobil ahead of Q2 Earnings?

Here, we will review Wall Street analysts’ opinion on BP (BP) and ExxonMobil (XOM) before their second-quarter earnings. BP and XOM are covered by 11 and 22 Wall Street analysts, respectively, of which 45% and 27% rate them a “buy.” Also, BP’s implied gains of 19% stand above ExxonMobil’s implied gains of 11%.

Why analysts’ opinion on BP is divided

BP has a robust upstream portfolio with a strong pipeline of projects. In Q1 2019, BP’s upstream production grew by 2% YoY. Plus, the company began three major upstream projects. Also, the company has a series of projects expected to start in 2021, which has strengthened the company’s upstream asset base and growth prospects.

However, BP has a weak debt and cash flow position. BP’s total debt-to-capital ratio of 43% stood above the peer average in the first quarter. Higher debt ratio reduces the company’s financial strength and flexibility to handle tough times. In comparison, Royal Dutch Shell (RDS.A) and Total’s (TOT) ratios stood at 32% and 33%, respectively, in Q1 2019.

Further, BP’s cash flow from operations fell short in covering its capex, acquisition, and dividend outflows in the year. Usually, a shortfall is not ideal for a company as it could result in more-than-estimated debt or divestments. If we estimate BP’s shortfall as a percentage of its earnings capacity (cash flow from operations), it stood at 31% in Q1 2019. Peers Shell (RDS.A) and Total (TOT) had cash flow shortfalls of 4% and 25%, respectively, in the quarter.

ExxonMobil’s mixed ratings

ExxonMobil has a modern downstream asset base, which is expected to boost its margins. Plus, the company has a sizeable upstream portfolio. ExxonMobil’s critical assets in the offshore Guyana and Permian regions grew in the first quarter. Thus, ExxonMobil has a sound integrated earnings model capable of generating earnings in volatile business conditions.

Besides, ExxonMobil’s financials are stronger compared to peers in the industry. In Q1 2019, the company had the lowest total debt-to-total capital ratio among peers globally. Plus, the company had a decent cash flow position.

However, in the first quarter, ExxonMobil’s earnings fell and missed estimates. Going forward, Wall Street analysts expect ExxonMobil’s earnings to fall by 20% in 2019. Also, ExxonMobil stock trades at a higher valuation. XOM trades at 17.8x its forward PE and 7.9x its forward EV-to-EBITDA, both above peer averages.

Overall, analysts’ opinions on XOM are divided due to its robust financials and integrated earnings model on one end and higher valuations and expected fall in earnings in 2019 on the other end.

More From Market Realist