Oil and gas companies have had two years of skyrocketing growth, but this earnings season could mark the beginning of their descent back down to earth.
Wall Street analysts say that Big Oil has passed its peak, but the ride down will be slow — these companies will still bring in remarkably large profits for a while.
What's happening: The story of 2022 (and 2021 to a lesser extent) was energy. Brutally high oil and gas prices were the talk of the town and one of the largest contributing factors to sky-high inflation. That was bad news for drivers, but ended up being great for the energy industry as oil prices and energy stocks are closely interlinked.
As markets fell under the pressures of economic uncertainty, geopolitical chaos, elevated inflation and a hawkish Fed, the energy sector thrived. The S&P ended 2022 down nearly 20%, while the energy sector grew by about 60%. No other sector gained even 5% last year.
But analysts say US oil companies can't keep winning for much longer.
"Although 2023 should remain a solid year for the integrated oils, there is less headroom than we envisaged just a couple of months ago given the correction in oil prices and halving in European gas prices," wrote HSBC Global Research analysts in a note.
Bank of America estimates that fourth-quarter earnings for oil and gas producers will be down 11% from third-quarter levels.
"In our view, upcoming earnings for the US oils will be one of the most consequential in several years," wrote Doug Leggate, a Bank of America research analyst, in a recent note to investors. "It is now clear that the best quarter for many US oils has passed."
Big names have already reported misses. Chevron posted $7.9 billion in fourth-quarter profit on Friday. That was lower than its profit in the third quarter and below Wall Street expectations, even though the company booked a record $36.5 billion in annual earnings.
Big profits for investors: Oil shareholders are still sleeping well at night. ExxonMobil, Chevron, BP, Shell and TotalEnergies are expected to report a combined mega-profit of $190 billion for 2022, according to estimates from Refinitiv.
They're also widely expected to use these mega-profits to reward their shareholders with dividends and buybacks. Chevron announced last week that it plans to buy $75 billion worth of its own shares, and hike its quarterly dividend.
Those buybacks may keep stock prices elevated for a while. "We think that buyback spending is probably the safety valve on uses of cash if fundamentals begin to deteriorate," wrote Stewart Glickman, deputy research director at CFRA in a note.
What's next: One key risk to the energy sector is the possibility of a steep recession which could cause "oil demand to careen into a ditch," wrote Glickman. "We have seen prior instances of demand falling through the floor and taking prices with it (see 2009, and again in 2020), so it is not out of the realm of possibility," he said.
Exxon reports today, Shell reports Thursday and BP and TotalEnergies report the following week. Analysts expect misses and some negative forward guidance.
Comments
Post a Comment