Will the Big Oil Companies Crush Earnings Estimates in Q3?

Some of the world’s top energy companies are set to report third-quarter earnings in the upcoming weeks. ExxonMobil XOM, Chevron CVX, Royal Dutch Shell (RDS.A), BP plc BP and TotalEnergies TTE will release their results sometime between Oct 28 and Nov 2.

After suffering heavy losses in the initial phase of the coronavirus outbreak when the energy sector was devastated by the pandemic-induced demand destruction and a price plunge, returns started to improve from the second half of 2020 on gradually tightening fundamentals. Thereafter, the first two quarters of this year further reinforced the Oil/Energy sector’s stability. The July-September period should be even better as commodity prices have rebounded sharply, revisiting their multi-year highs, following the vaccine progress and the ongoing macroeconomic recovery.

Let’s have a rundown:

So far this year, the “Big Oil” companies have been aided by a supportive macro backdrop and robust fundamentals. Cash flow was strong due to due to higher realizations in oil and gas prices.

The third quarter not only promises a sequential improvement but also a significantly better one than the year-ago quarter when the energy sector was just coming out of the pandemic-induced demand destruction and price plunge.

According to the U.S. Energy Information Administration, in July, August and September of 2020, the average monthly WTI crude price was $40.71, $42.34 and $39.63 per barrel, respectively. In 2021, average prices were $72.49 in July, $67.73 in August and $71.65 in September, i.e., much stronger year over year.

The news is even better on the natural gas front. In Q3 of 2020, U.S. Henry Hub average natural gas prices were $1.77 per MMBtu in July and rose to $2.30 in August before tumbling to $1.92 in September. Coming to 2021, the fuel was trading at $3,84, $4.07 and $5.16 per MMBtu, in July, August and September, respectively. In other words, natural gas traded noticeably higher in all the three months.

All the big energy companies reported second-quarter bottom line higher than what was reported in the corresponding period of 2020 (when most of them endured losses), thanks to rising prices. Industry observers are betting on further upside during the three months ended Sep 30, as oil and gas continue to surge amid slashing cost and capital expenditure, plus a marked improvement in fuel demand.

Apart from higher earnings, the environment of strong commodity prices has helped the big energy operators to generate significant “excess cash,” which they intend to use to boost investor returns.    

As proof of this, British energy major BP, which had a solid start to the year after comfortably beating first and second-quarter earnings estimates, announced plans to buy back $1.4 billion worth of shares by utilizing surplus cashflow that was generated through the January-to-June period. Continental rival Shell launched a $2 billion stock repurchase program to be completed by the end of 2021. France’s TotalEnergies said that it will spend up to 40% of the additional cash flows generated at a $60+ oil price environment to share buybacks. American supermajor Chevron revived its stock repurchase program and vowed to buy back $2-$3 billion in shares annually, starting from the third quarter.

ExxonMobil also recently expressed optimism that higher oil and gas prices would contribute to its third-quarter 2021 upstream earnings. Shell also expects the prevailing strong commodity price environment to significantly boost its Integrated Gas results.

However, there might be some repercussions from the devastating Hurricane Ida that severely disrupted the U.S. Gulf of Mexico production after sweeping through the region at the end of August. For that matter, Shell has already warned that it might have lost about $400 million in income when the storm forced it to shut down several Gulf facilities for days and weeks.

Overall, the energy behemoths will see sharply higher exploration and production results. The other important part of a supermajor’s business, the refining or the downstream unit, is also expected to show some improvement due to higher margins. There has been a considerable improvement in fuel consumption on the back of rebounding road and airline travel.

While some hurricane-related impact cannot be ruled out, prospects for the to-be-reported quarter are certainly looking up. The most painful downturn for the petroleum business is now a distant memory with energy biggies expected to follow up on a blowout second quarter with an even better third quarter.

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