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The Zacks Analyst Blog Highlights: Schlumberger, Halliburton, Royal Dutch, BP and ConocoPhillips

For Immediate Release

Chicago, IL – October 19, 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 Schlumberger SLB, Halliburton HAL, Royal Dutch Shell RDS.A, BP plc BP and ConocoPhillips COP.

Here are highlights from Friday’s Analyst Blog:

What to Expect When Energy Companies Report Q3 Earnings

The third-quarter Oils-Energy earnings season kicked off Friday with Schlumberger announcing its results and Halliburton following up on Monday.

Collapsing commodity prices and demand are likely to have played foul on the sector’s top and bottom lines with negative year-over-year growth expected on both fronts. While things got quite ugly in the second quarter with the full impact of the coronavirus pandemic when crude plunged into negative territory briefly, the July-September period should offer better returns on gradually tightening fundamentals. Amid expectations of improving data, investors will also be looking for further 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:

Top & Bottom Lines to be Lower Than a Year Ago

According to the U.S. Energy Information Administration, in July, August and September of 2019, the average monthly WTI crude price was $57.35, $54.81 and $56.95 per barrel, respectively. This year, average prices were much lower — $40.71 in July, $42.34 in August and $39.63 in September.

The news is not rosy on the natural gas front either. In Q3 of last year, U.S. Henry Hub average natural gas prices were $2.37 per MMBtu in July and fell to $2.22 in August before recovering to $2.56 in September. Coming to 2020, the fuel was trading at $1.77, $2.30 and $1.92 per MMBtu, in July, August and September, respectively.

Taking into account the sharp drop in commodity price, the picture looks rather downbeat for the Q3 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 106% from third-quarter 2019 on 31.1% lower revenues.

A Word on the Sub-Industries’ Expected Performance

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 crack spreads (or refining margins) and storm-related disruptions that will offset the slight improvement in utilization.

Meanwhile, 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. Agreed, rig count has stabilized and completion activity is looking up too but overcapacity and pricing pressure would restrict the positive impact.

Finally, 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 declining-to-flat volumes through their facilities, contributing to expectations for depressed profits. Despite having a lower correlation to oil and gas prices compared to its other energy peers, the energy infrastructure providers have struggled with the implications of lower commodity realizations and demand destruction. 

Safety of Dividends/Distributions

A number of energy companies — including some of the world’s biggest — announced coronavirus-related dividend cuts during the previous two quarters. Schlumberger lowered its payout by 75%, while Zacks Rank #3 (Hold) Royal Dutch Shell cut its dividend for the first time since World War II to weather the historic oil price crash and save funds. Meanwhile, BP plc was forced to slash its payout after a decade.

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

However, industry observers see the recent dividend hike by ConocoPhillips as a sign of confidence in the outlook for oil prices. While all eyes will be on the U.S. supermajors, it is unlikely that any of them will take their dividend down this time around amid WTI’ crude’s new-found stability at around $40 per barrel.

The major midstream players — being largely insulated to fluctuations in commodity prices— have managed to maintain their distribution levels thus far. Further, their relatively steady coverage and improving commodity price visibility should represent a more predictable midstream payout scenario in the third quarter.

Shale Producers Will Be Closely Watched

Over the past three months, oil price has been essentially hovering around the $40-a-barrel mark. With this firmed-up price 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 Oasis Petroleum, Lonestar Resources, Chaparral Energy, Extraction Oil & Gas, Lilis Energy, Ultra Petroleum Chesapeake Energy (CHKAQ) were already struggling to make a profit before the coronavirus had struck and therefore filed for bankruptcy. At the average third-quarter crude prices of around $41 per barrel, a lot more firms are unlikely to hit cash flow breakeven.   

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

Keep an Eye on Notable Positive Indicators

The second-quarter results were likely the weakest sector performance in years with the period bearing the maximum impact of coronavirus. While the third quarter isn’t going to be strikingly better, we expect some improvement based on the stabilization of oil prices, an uptick in natural gas realizations and no major pullback in production.  

The quarterly announcements 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 http://www.zacks.com/performancefor information about the performance numbers displayed in this press release.


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Schlumberger Limited (SLB): Free Stock Analysis Report
 
Halliburton Company (HAL): Free Stock Analysis Report
 
ConocoPhillips (COP): Free Stock Analysis Report
 
BP p.l.c. (BP): Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report
 
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