Halliburton, Schlumberger, Royal Dutch Shell, BP and ExxonMobil

Elva Mankin

For Immediate Release

Chicago, IL – July 21, 2020 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Halliburton HAL, Schlumberger SLB, Royal Dutch Shell RDS.A, BP plc BP and ExxonMobil XOM.

Here are highlights from Monday’s Analyst Blog:

5 Things to Look for in Energy for Q2 Earnings

The second-quarter earnings season for Oils-Energy got underway today with oilfield service giant Halliburton reporting results. Collapsing commodity prices and demand are likely to have played foul on the sector’s top and bottom lines with negative growth expected on both fronts.

While things started getting bad toward the end of the first quarter, the full impact of the coronavirus pandemic and the oil price slump may only have been felt in the April-June period when crude plunged into negative territory briefly. Amid expectations of dismal data, investors will also be looking for early signs of a rebound for the remainder of 2020.

Over the next month or so, as we make our way through the earnings deluge, here are five things to look for:

Comparison with the Year-Ago Period:

According to the U.S. Energy Information Administration, in April, May and June of 2019, the average monthly WTI crude price was $63.86, $60.83 and $54.66 per barrel, respectively. This year, average prices were much lower – $16.55 in April, $28.56 in May and $38.31 in June.

The news is not rosy on the natural gas front either. In Q2 of last year, U.S. Henry Hub average natural gas prices were $2.65 per MMBtu in April, falling to $2.64 in May and $2.40 in June. Coming to 2020, the fuel was trading at $1.74, $1.75 and $1.63 per MMBtu, in April, May and June, respectively.

Taking into account the sharp drop in commodity price, the picture looks rather downbeat for the Q2 earnings season. Per the latest Earnings Preview, Energy is likely to have experienced a big earnings decline from a year earlier. Per our expectations, the sector’s earnings are likely to have slumped 146.4% from second-quarter 2019 on 42.2% lower revenues.

Performance of Sub-Industries:

From upstream (exploration and production) to midstream (pipelines) to downstream (refining and distribution), no subset of energy has been immune to the coronavirus-induced downturn.

While the price slump will greatly impact the results of E&P companies for obvious reasons, the refiners’ numbers will be dragged down by lower utilization due to collapse in consumption for jet fuel and gasoline. Meanwhile, with E&P operators pulling back activities and curtailing production in response to sharply lower commodity pricing and demand, the pipeline companies are faced with a decline in volumes through their facilities, contributing to expectations for lower profits.   

Finally, the trough in prices and demand has pushed drilling activity lower. This automatically translates into lesser work for the oilfield service firms – companies that make it possible for upstream players to drill for oil and gas.  

Will Another Major Cut its Dividend?

A number of energy companies – including some of the world’s biggest – announced coronavirus-related dividend cuts during the previous quarter.

While announcing first quarter earnings, oilfield service biggie Schlumberger lowered its dividend by 75%. But what caused the greatest shock among investors was the decision by Royal Dutch Shell to trim its dividend. The Zacks Rank #2 (Buy) supermajor, a reliable high-yield income choice till recently, slashed its quarterly dividend by two-thirds to weather the historic oil price crash and save funds.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

With the world’s top energy companies under heavy pressure, will more ‘Big Oil’ firms follow Equinor and Shell and take their dividend down? All eyes are on BP plc and ExxonMobil, whose outsized payout ratios certainly raise questions about the security of their exceptional yields moving forward.  

Shale Producers in the Spotlight

Oil was revolving around $20-a-barrel when most shale companies reported first-quarter earnings. Based on those prices, EPS estimates for Q2 were formed. Over the past three months, a lot has changed, including the oil price. Now, with crude essentially doubling from Q1 levels and some previously shut-in production coming back online, shale operators could surprise on the upside.  

Oil between $45 and $50 a barrel is considered the break-even point for most shale operators, which means that they need crude prices of at least $45 to balance their operating cash flows with capital expenditure. Some shale companies such as Whiting Petroleum were already struggling to turn a profit even before the coronavirus struck and have since filed for bankruptcy. Therefore, at the prevailing crude prices of around $40 per barrel, a lot more firms are unlikely to hit cash flow breakeven.   

But it’s a price that incentivizes them to bring back bulk of their voluntary production cuts, leads to improved cash flows and increases chances of an earnings beat.

Look Out for Positive Updates

No doubt, the second-quarter results are going to be brutal for energy with the period bearing the maximum impact of coronavirus. However, it will also present an opportunity for the companies to highlight the actions taken in response to the crisis and how these will help them adjust to the new normal. An effective way to gauge a company’s strength and resilience is to look out for improved guidance. Of particular interest will be cost reduction initiatives, updates on free cash flow, and upward revision in estimated production.    

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.

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