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Earnings Preview: Is Slump in Oil Patch Over; What’s 2017 Outlook?

January 3, 2017
Market analysts discuss oil stock forecast.

Could the two-year slump in the oil patch finally be ending? While actions by the world’s largest cartel of oil-producing countries recently moved to position crude for a price recovery, Q4 reports—while not expected to be as “subdued” as in recent periods—are still anticipated to be weighed down by a glut of product, according to analysts.

That said, the S&P 500’s energy sector was among the best performing among the index’s 11 sectors in 2016.

After several meetings, the Organization of Petroleum Exporting Countries (OPEC), and 11 non-OPEC nations, including Russia, promised in early December to decrease production by 1.2 million barrels daily in the first six months of 2017. If the plan goes through as pledged—and some are skeptical that it will—the reduction of supply is expected to rebalance the sector by upping per-barrel costs for oil, and, in turn, gasoline prices. (The U.S. is not part of OPEC and is not part of the deal.)

That may help both the top and bottom lines of energy behemoths like ExxonMobil (XOM) and Chevron (CVX), and of oilfield services firms like Halliburton (HAL), but unlikely to be soon enough to be reflected in Q4 numbers. Remember that this flood of oil in world markets has been to the detriment of North American oil and gas companies.

Hayes & Boone, a Houston-based bankruptcy law firm, reported that as of early December, 70 oilfield service companies had filed for Chapter 11 bankruptcy in 2016. That’s up nearly 80% from the 39 companies filing in 2015. From June through October alone, nine companies with at least $100 million in debt filed for bankruptcy protection. They represented some $9.0 billion in liabilities, according to Hayes & Boone, topping the total for the previous 18 months of $8.2 billion in debt. An estimated 350,000 workers have lost their jobs in the process.

Credit Suisse noted that as devastating as that was, it was “no surprise” as the oilfield service industry “prepares for a strong recovery in 2017.”

HAL, among the giants of products and services providers to the industry, is expected to turn in results Jan. 23. Wall Street sees its Q4 per-share profit diving nearly 97% to $0.01 from $0.31 in the year-ago period. However, estimates going forward into 2017 show that this quarter may mark the end of the downward slide over the last two years, with a slow move upward projected. The company estimates a similar path for revenue, though its Q4 sales forecast is less than half that from two years ago.

The energy giants XOM and CVX are both set to report on Jan. 31. According to consensus reports compiled by Thomson Reuters, XOM is expected to earn $0.72 a share on revenue of $69.1 billion—both improvements over the last two-year period. A similar improvement is expected for CVX, with analysts projecting per-share earnings of $0.67 a share on sales of $34.3 billion, the first upturn on a quarterly basis in four years.

Wall Street analysts, not surprisingly, say they are setting their sights on the 2017 outlook from oil company executives during quarterly releases and conference calls. But the International Energy Agency warns that the coming weeks will be a crucial period for the industry and commodity prices.

“For contractual and logistical reasons, we might initially see that the output cuts do not fall neatly into place,” the Paris-based organization said in a commentary in mid-December, according to published reports.

"The (OPEC) deal is for six months and we should allow time for it to be implemented before re-assessing our market outlook,” the IEA added. “Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices.”

TD Ameritrade clients can get a visual view of the energy and oil services sector via a heat map in the thinkorswim® platform. (See figure 1 below.) The size of the square indicates the market cap of that company. With just a click, you can quickly access fundamentals, news, charts and more. 

Energy Sector Heat Map


To find this Heat Map in the platform, click MarketWatch > Visualize > Indices > S&P 500 > Energy. Image source: the TD Ameritrade thinkorswim platformFor illustrative purposes only. Past performance does not guarantee future results.

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