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Basic Materials, Energy Sectors Looking to Rally In Upcoming Earnings

October 6, 2016
Basic Materials Oil Production Earnings Preview

Depressed commodity prices and uncertainty around global economic growth weighed on Materials and Energy companies for much of 2016, but the sectors have started to recover as commodity prices rebounded from January lows. According to FactSet, a financial research firm, the Materials sector is expected to report the third highest earnings growth in Q3 out of the eleven sectors of the S&P 500. The 3.9% projected earnings growth is almost entirely due to the estimated 262% earnings growth in the metals & mining industry.

Lightweight metals manufacturer Alcoa (AA) has mostly traded sideways with the price of metals, despite posting earnings $0.06 above consensus estimates in Q2. When the company reports Q3 earnings on October 10, analysts are expecting $0.11 earnings per share on $5.22 billion in revenue.

Many companies in the energy sector are still waiting on higher oil and gas prices to boost revenues and profits. According to Moody’s Investor Services, year to date bankruptcies among oil and gas companies are already double what they were for all of 2015.The sector is expected to be the worst performer among the S&P 500 and estimated to report a year-over-year decline of 11.9% in revenue and 66.4% in earnings.

Halliburton (HAL) is set to report on October 19 and its Q3 earnings should improve substantially from Q2. Last quarter, HAL was forced to pay Baker Hughes (BHI) a $3.5 billion breakup fee when the planned merger between the two fell apart due to antitrust concerns. The breakup fee was a major contributor to the company’s multi-billion dollar loss in Q2.

Energy giants Exxon Mobil (XOM) and Chevron (CVX) are both set to report on October 28. XOM is expected to earn $0.67 per share on revenue of $66.38 billion and CVX is expected to earn $0.45 per share on revenue of $29.71 billion. Both companies have suffered due to low energy prices and declining refining income. Last quarter, CVX posted its worst quarterly loss since 2001 and XOM’s quarterly profit declined 59%. As the industry adapts to low oil prices, the challenge for many companies has been balancing lower cash flows while still maintaining necessary capital expenditures in future production.

Balancing oil production and demand

OPEC producers have flirted with the idea of a production freeze throughout the year, but the chances of any agreement are slim amid ongoing disagreements between Saudi Arabia and Iran. Saudi Arabia, OPEC’s biggest producer, has so far maintained its stance to maintain market share and let the market balance itself. The International Energy Agency (IEA) estimates that global oil demand will rise by 1.3 million barrels per day (MMb/d) in 2016 to 96.1 MMb/d. Declining U.S. oil production is expected to bring down global oversupply and reduced investment in new production should lead to greater output declines in the future and help markets rebalance in 2017. Without a significant change in production and demand, continue to expect sideways price action in crude-oil for the remainder of the year.  

Will metals continue to shine?

For different reasons, metals including gold, iron ore, and steel have all rallied significantly in 2016, but prices have declined in recent months. Gold and gold miners have benefited from increasing demand for gold due to interest rate and inflation concerns. Steel makers have also rallied sharply year to date, but weak demand and massive overcapacity in China will continue to weigh on the industry. U.S. steel companies benefited from the Commerce Department’s new tariffs on imported steel, which can run as high as 266%, but there are still concerns about the future of the industry.   

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