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Investors eye signs of improvement in US energy earnings

Thursday, July 28, 2016 - 08:27
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Investors reeling from several quarters of declines from US energy companies are optimistic that a recent oil rebound may help boost results of exploration and production companies reporting in the coming days.

[NEW YORK] Investors reeling from several quarters of declines from US energy companies are optimistic that a recent oil rebound may help boost results of exploration and production companies reporting in the coming days.

After a nearly two-year slide in crude, higher oil prices may lead to higher production this year and in 2017, investors believe.

However, a lot depends on whether the big rally in oil prices from February lows has run its course.

US oil prices, trading around US$42 a barrel, are back at April levels after jumping 26.1 per cent in the second quarter, their best quarterly gain since 2009.

Shares of exploration and production (E&P) companies have done well this year, with gains of 11.2 per cent in the S&P oil and gas E&P index since Dec 31 compared with a 6.0 per cent rise in the S&P 500.

"The big question of course is oil prices," said Mike Breard, analyst at Hodges Capital Management in Dallas, Texas."The main thing people should look at when these companies report second-quarter earnings is if they're going to add wells or do something to increase production in the second half of the year and in 2017."

Second-quarter earnings for the S&P 500 energy sector, though still forecast down 77.7 per cent from a year ago, are expected to have improved from the first quarter, when profits fell 105.7 per cent - seen as the bottom of the current energy sector profit downturn, Thomson Reuters data shows.

Independent E&P companies such as Apache and Devon Energy, both of which are due to report results next week, may benefit the most from better oil prices, while the impact on integrated oil majors including Exxon Mobil and Chevron, due to report Friday, may be more mixed.

"The big oil companies are so diversified and hedged that we're unlikely to see a big surprise from them one way or the other," said Tim Ghriskey, chief investment officer of asset management company Solaris Group in Bedford Hills, New York, which is overweight energy.

Overseas, BP's earnings on Tuesday missed expectations and its shares fell even though it said it would pursue three new projects this year.

Exxon shares are up 16.6 per cent in 2016, while Chevron is up 13.7 per cent.

Early results from US companies have been mixed. Anadarko Petroleum and Hess Corp this week reported smaller-than-expected quarterly losses, though Hess further cut its E&P budget for the year.

For refiners, the outlook remains grim. Profits are expected to slide for a third straight quarter and lower crude volumes are seen hitting margins.

The S&P oil and gas refining and marketing index is down 20.2 per cent for the year so far.

"The performance is largely explained by a disappointing gasoline market," Cowen and Company analysts wrote in a recent note. "Gasoline margins are now expected to be lower year over year, and upside risk is uncertain."

REUTERS