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Earnings Preview: Oil Giants Exxon Mobil and Chevron Report Soon

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July 27, 2017
Oil Rig
istockphoto.com/vladimirovic

It’s been a busy week between the parade of earnings reports, the Fed’s July meeting, and a slew of economic data coming out. In upcoming earnings, major energy companies Exxon Mobil (XOM) and Chevron (CVX) report Q2 results tomorrow morning.

Stating the obvious, it’s been a tough couple of years for the energy sector as oil and natural gas prices have remained in a slump for much longer than many expected. A global economic slowdown, fuel efficiency improvements, and increased production and exports in certain markets have been just some of the contributing factors to the supply and demand imbalance that has caused oil prices to plummet in recent years. There’s been some signs the imbalance is improving, but it remains to be seen how things will play out over the long term.

Crude stocks fell more than 7 million barrels last week, along with a significant decline in gasoline stocks, according to the Energy Information Agency (EIA). At the same time, U.S. crude oil production still remains above 9.4 million barrels a day, which is the highest level seen in two years. To put that number in perspective, record U.S. production was 10 million barrels a day back in the 1970’s.

OPEC announced supply cuts to try to prop up prices and get supply and demand back in line, but so far their cuts haven’t had the desired effect. At the end of May, OPEC and non-member producers, such as Russia, announced they are extending their 1.8 million barrel per day supply cut. Members of the cartel don’t always stick to their agreements, but this time around it seems like they are for the most part (approximately 90% compliance according to Reuters).

Natural gas prices have also been hit amid an oversupply problem, and the world’s largest exporter of liquid natural gas, Qatar, recently announced it plans to increase exports by 30% over the next several years. Like oil prices, it’ll take a while to see how supply and demand will play out and where prices will be in upcoming quarters.

To address this challenging market, energy companies, including Chevron and Exxon Mobil, have announced significant reductions to their capital expenditures as well as other cost-cutting efforts including layoffs and suspending share buybacks. According to CFRA analysts, these steps have helped improve free cash flow to support dividends.

As a result of their size and scope, Exxon Mobil and Chevron are exposed to many different aspects of energy markets, but their businesses are largely driven by the price of oil and natural gas.

Exxon Mobil Earnings and Trading Activity

For the second quarter, Exxon Mobil is expected to report earnings of $0.83 per share, up from $0.41 in Q2 2016, on revenue of $61.16 billion, according to Wall Street consensus analyst estimates. Revenue is projected to increase 6% from the $57.69 billion it reported in the year-ago period.

The stock hit a 52-week high of $93.22 in December last year, but sharply declined at the start of the year and has traded in a pretty tight range for much of the year. It’s down 11.79% year to date and is currently trading just around $80. Options traders have priced in about a 1.6% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the July 28 expiration, both calls and puts have been active at the 80 strike price, right at the money. As of this morning, the implied volatility sits at the 40th percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Exxon Mobil (XOM) stock ytd performance charted on thinkorswim.

FIGURE 1: A TOUGH TIME FOR OIL.

Shortly before the start of the year, Exxon Mobil (XOM) hit a new 52-week high of $93.22. So far in 2017, the stock has declined 11.79% and hit a 52-week low of $79.26 on June 2. Since then, the stock hasn’t moved much and is currently trading around $80. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Chevron Earnings and Trading Activity

For its second-quarter results, Chevron is expected to report earnings of $0.89 per share, up from $0.49 in Q2 2016, on revenue of $31.18 billion, according to Wall Street consensus analyst estimates. Revenue is projected to increase 6.5% from the $29.28 billion it reported in the year-ago period.

The stock hit a recent low of $102.55 on June 7, but it has remained above its 52-week low of $97.53. It declined through the first half of the year, and has traded in a pretty tight range for the past several months. It’s down 10.72% year to date and is currently trading around $105.

Options traders have priced in about a 1.8% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move. In short-term trading at the July 28 expiration, calls have been active at the 108 strike price, with a decent amount of activity at the 105 and 106 strikes as well. Puts have been active across a range of strikes, with several large trades at the 111 strike. As of this morning, the implied volatility sits at the 46th percentile. 

Chevron (CVX) stock ytd performance charted on thinkorswim.

FIGURE 2: A SIMILAR CHART.

As energy prices declined, the big oil and gas companies have moved in lockstep with it. Like Exxon Mobil, Chevron (CVX) has declined through the first half of the year and is down 10.65% so far in 2017 while the S&P 500 (SPX) has increased about 10%. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Looking Ahead

In addition to reports for these two energy companies, tomorrow we have the first estimate for Q2 GDP coming out. It’s the first of three estimates that will be released, so it’ll still be a bit before we see the finalized estimates for the quarter, but we could see some heightened volatility depending on the first round of results. Currently, the consensus among Wall Street analysts is for 2.8% growth, according to Briefing.com.

Good Trading,
JJ
@TDAJJKinahan

NC
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