Oil and gas stocks have been on a two-year tear, ripping ahead as natural gas prices surged due to supply chain kinks, a strong economy, and Russia's invasion of Ukraine. But fears of a recession are now slamming on the brakes.
What's happening: Brutally high oil and gas prices were the talk of the town last year and one of the largest contributing factors to sky-high inflation. That's bad news for automobile drivers, but ended up being great for the energy industry as oil prices and energy stocks are closely interlinked.
The energy sector returned more than 60% last year, significantly outperforming every other S&P 500 sector. No other sector gained even 5% in 2022.
Earnings ahead: Lately, those surges have been ebbing. The S&P 500 energy sector is down about 1.4% so far this year and was among the weakest on Thursday. It finished the day 0.9% lower. Oil prices, meanwhile, fell by $2 per barrel as fears of a recession rise.
A recession would weaken demand for fuel as consumers watch their spending at the pump.
The five largest oil companies — ExxonMobil, Chevron, Shell, BP and TotalEnergies — made record profits in 2022, pulling in about $200 billion. That's on par with Greece's entire gross domestic product for the year.
Now, as those companies prepare to report first quarter earnings for 2023, analysts are expecting a bit of a profit pullback.
"At a high level, we expect a mixed quarter with headline earnings that disappoint against the consensus estimates," wrote Bank of America analyst Doug Leggate in a note this week.
Analysts at Moody's agree. They expect growth in demand for oil and natural gas will ease as the largest economies cool off over the next two years. "Our macroeconomic base case points toward a global slowdown in economic activity on account of tight monetary and financial conditions," they wrote in a note.
That will be reflected in the earnings of the top five companies which Moody's analysts say will likely decline over the next two years — though not by too much.
Beyond earnings: At the risk of sounding like a broken record, Q1 earnings reports aren't really about last quarter.
Oil analysts are already thinking about the future — and they're predicting hard times for Americans at the pump. That typically translates to lower payouts for Big Oil.
But a surprise move by OPEC+, an alliance between the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil-producing countries, including Russia, Mexico, and Kazakhstan, to cut oil production by more than 1.6 million barrels a day, could limit the downside for prices, and oil company earnings.
"Oil fundamentals are expected to tighten as we move through the year, wrote Warren Patterson, head of commodities strategy at ING in a note earlier this month. "Prior to these cuts, we were already expecting the oil market to see a fairly sizable deficit over the second half or 2023. Clearly, this will be even larger now."
Though demand for gas and oil will likely slow in step with the global economy, constrained supply means that Big Oil should do just fine, even if last year's record profits won't be repeated.
Coming up: Exxon and Chevron report first quarter earnings next Friday. Exxon is expected to report earnings-per-share of $2.60, according to Refinitiv. Chevron is expected to report earnings of $3.38 per share.
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