Excitement Builds As Big Oil Prepares To Release Earnings

• ▶After a disastrous 2020, oil majors have now well and truly recovered and analysts expect an impressive earnings season this quarter

• ▶Both oil prices and natural gas prices are significantly higher than where they were this time last year, and earnings should reflect that

• ▶The reduction in oil and gas hedging this year is another reason to expect strong earnings from Big Oil

Third-quarter 2021 earnings season is about to hit high gear, with 72 S&P 500 companies set to report this week. Among them are four energy companies, namely NextEra Energy (NYSE:NEE), NextEra Energy Partners, L.P. (NYSE: NEP), Schlumberger N.V. (NYSE:SLB), and Halliburton Co. (NYSE:HAL).

The energy sector posted stellar earnings during the first half of the year, and the third quarter is expected to continue this trend thanks to huge improvements in commodity prices.

The sector reported Q2 2021 earnings of $13.9 billion compared to a loss of -$10.6 billion in Q2 2020, thanks to vast improvements in commodity prices especially crude, which averaged $66.17/bbl in Q2 2021 compared to $28/bbl in Q2 2020 and $61/bbl in Q1 2021. American oil and gas supermajors ExxonMobil (NYSE:XOM) and Chevron(NYSE:CVX) were the largest contributors to the improved earnings for the sector, with the two companies accounting for $13.3 billion of the $24.6 billion year-over-year increase in earnings for the sector.

The oil and gas rally continued throughout the third quarter, meaning even better margins and cash flows.

According to the U.S. Energy Information Administration, WTI crude prices averaged $72.49 in July, $67.73 in August, and $71.65 in September this year compared to $40.71, $42.34, and $39.63 in the months of July, August, and September of 2020, respectively.

The natural gas front has been even more impressive: In Q3 of 2020, U.S. Henry Hub average natural gas prices were $3,84, $4.07, and $5.16 per MMBtu, in July, August, and September 2021 compared to $1.77 per MMBtu, $2.30, and $1.92 in July, August and September 2020, respectively.

Source: Y-Charts

Yet another reason why earnings could impress: Less oil and gas hedging.

Rystad Energy says the U.S. shale industry is on course to set a significant milestone in 2021: Record pre-hedge revenues.

According to the Norwegian energy navel-gazer, U.S. shale producers can expect a record-high hydrocarbon revenue of $195 billion before factoring in hedges in 2021 if WTI futures continue their strong run and average at $60 per barrel this year and natural gas and NGL prices remain steady. The previous record for pre-hedge revenues was $191 billion set in 2019.

Rystad says hedging losses might not be that high because producers are not so keen on using them this time around.

Shale companies typically increase production and add to hedges when oil prices rally, in a bid to lock in profits. However, the mad post-pandemic rally has left many wondering whether this can really last and led to many firms backing off from hedging. Indeed, 53 oil producers tracked by Wood Mackenzie have only hedged 32% of expected 2021 production volumes, considerably less than the same time a year ago.

Here's a rundown of what to expect when the oil and gas supermajors report third-quarter earnings.

#1. ExxonMobil

North America's largest oil and gas company, ExxonMobil Corp.(NYSE:XOM), is scheduled to report third-quarter earnings on October 29. Wall Street has a consensus EPS forecast of $1.51 for the company, a huge jump compared to last year's $-0.18. Exxon is expected to report revenue of $75.2B vs. $46.01B for last year's corresponding quarter.

Sentiment around the company has remained positive and helped XOM shares jump 51.8% in the year-to-date. The shares have been trending upward after the company reported preliminary Q3 estimates. In the report, XOM announced that higher natural gas prices could improve Q3 earnings by $500M-900M over Q2 levels, while higher oil prices could lift profits by $200M-600M.

Two weeks ago, the company raised its estimate of the discovered recoverable resource at the Stabroek Block offshore Guyana, including a new discovery at the Cataback-1 well, to ~10B boe. Exxon owns a 45% stake in the block; Hess (NYSE:HES) holds 30%, while CNOOC (NYSE:CEO) lays claim to 25%.

#2. Chevron

Exxon's close peer, Chevron Corp. (NYSE:CVX), is expected to report earnings on October 29 before market open. Chevron has a consensus EPS forecast for the quarter of $2.20, with reported EPS for the same quarter last year being $0.11. Q3 revenue is expected to clock in at $40.18B vs. $24B a year ago.

Chevron Chairman and CEO Michael Wirth recently expressed optimism about the oil price trajectory, saying that he sees "a fair amount of support" after prices spiked above $80 a barrel in recent weeks.

Wirth noted that oil prices have been making strong gains in a seasonally weak October period, which normally sees a lull in demand.

"The fact that we've seen prices actually strengthen at a time when they typically weaken, suggests that there's a fair amount of support in the market," he said.

For the long-term outlook, Wirth noted that the rising demand for green energy has made it more difficult to develop new supplies of oil and also increased pressure on companies to return excess cash to shareholders in the form of dividends and buybacks rather than spending it on new exploration and drilling.

#3. ConocoPhillips

ConocoPhillips (NYSE:COP) is expected to report third-quarter earnings on the 2nd of November 2021 before market open.  

COP has a consensus EPS forecast of $1.46, a huge improvement over $-0.31 reported for last year's corresponding period, while revenue is expected to clock in at $10.81B vs. $4.38B for last year's period. COP has beat earnings estimates for three straight quarters.

A couple of months ago, Bank of America upgraded COP shares to Buy from Neutral with a $67 price target, calling the company a "cash machine" with the potential for accelerated returns.

According to BofA analyst Doug Leggate, Conoco looks "poised to accelerate cash returns at an earlier and more significant pace than any 'pure-play' E&P or oil major." 

Leggate COP shares have pulled back to more attractive levels "but with a different macro outlook from when [Brent] oil peaked close to $70."

But best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery.

But BofA is not the only Wall Street punter that's gushing about COP.

In a note to clients, Raymond James says the company's stock price is undervaluing the flood of cash the oil and gas company is poised to generate.

A month ago, COP hiked its dividend by 7% to $0.46 per share. The shares currently yield 2.47%, suggesting there's plenty of room for further increases.

Earnings and revenue estimates for the other four members of the seven oil and gas supermajors are as follows

• Royal Dutch Shell (NYSE:RDS.A) is expected to report earnings on the 28th of October 2021, before market open. The report will be for the fiscal quarter ending June 2021. Shell has a consensus EPS forecast for the quarter of $1.37 vs. $0.24 a year ago.

• BP Plc. (NYSE:BP) will report third-quarter earnings on the 2nd of November 2021, before market open. The report will be for the fiscal quarter ending Jun 2021. BP has a consensus EPS forecast for the quarter of $0.88 vs. $0.03 for Q3 2020 with a consensus revenue estimate of $38.33B.

• TotalEnergies SE (NYSE:TTE) is expected to report earnings on the 29th of October 2021. The French supermajor is expected to report EPS of $1.15 vs. $0.29 a year ago with revenue expected to come in at $46.82B vs. $33.14B a year ago.

• Eni S.p.A (NYSE:E) is expected to report second-quarter earnings on the 3rd of August 2021. The company has an EPS estimate of $0.81 vs. -0.10 a year ago with no revenue estimates available.