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Upcoming Energy Earnings: XOM and CVX Report on Friday Morning

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October 24, 2017
Stack of oil barrels
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Two of the oil supermajors are slated to release their quarterly results at the end of the week. Both ExxonMobil (XOM) and Chevron (CVX) report earnings before the opening bell on Friday, Oct. 27.

At the start of the third quarter, WTI and Brent crude oil were trading in the mid-$40 range again, and natural gas prices remained below the $3 mark. By the end of the quarter, oil prices had moved sharply higher, with Brent crude spot prices increasing almost 20% and WTI crude spot prices climbing about 14.5%.

During the third quarter, several hurricanes hit the U.S. Gulf Coast, with Hurricane Harvey disrupting key operations in the Texas area. Many companies have reported they’ve brought operations back online, but earnings calls for Q3 might bring some additional clarity to the extent of the damage and impact on operations as well as the overall market.  

Chart showing WTI Crude Futures, Brent Crude Futures and Natural Gas Futures

FIGURE 1: PRICE RECOVERY IN Q3.

The chart above shows prices over the third quarter for Light Sweet Crude Oil Futures (/CL) as the yellow line, Brent Crude Futures (/BZ) as the purple line and Natural Gas Futures (/NG) as the teal line, with the percentage change on the right hand side of the chart. Chart source: thinkorswim® from TD Ameritrade.  Data Source: CME Group. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

ExxonMobil Earnings and Options Trading Activity

Management typically provides some commentary about its key assets and progress at those operations. For XOM, two areas it has been focused on in recent quarters are the Permian Basin in the U.S. and the Liza Field off the coast of Guyana.

At the start of the year, the company announced it had more than doubled its Permian Basin resource to 6 billion barrels of oil equivalent by acquiring companies owned by the Bass family with leaseholds of 275,000 acres (250,000 of them in the Permian). In September, XOM announced it had added another 22,000 acres to its Permian Basin portfolio. And recently, it also announced it had acquired an oil terminal from Genesis Energy (GEL), which it said was its first that is anchored by its acreage in the Delaware Basin, part of the broader Permian.

In October, XOM announced its fifth discovery of reservoirs at the Liza Field. With a 2020 target for the Phase 1 development of the project, it’s still a few years off before it starts ramping up production. The company’s affiliate, Esso Exploration and Production Guyana, holds a 45% interest in the 6.6 million acre Sabroek Block where the Liza Field is located.

At the end of August, XOM announced it had completed the acquisition of Jurong Aromatics, a Singapore-based petrochemical company that is close to its existing operations in the area. Management said the acquisition “will help us better serve our customers in key Asian growth markets” and that “they will continue to make strategic investments to ensure ExxonMobil is well positioned to meet increasing global demand for chemical products.” XOM has said it expects global chemical demand to grow at a 4% year-over-year pace for the next decade, with particularly strong demand in the Asia-Pacific region.

In addition to the company’s current projects, analysts also might be looking for some commentary around the impact of Hurricane Harvey on XOM’s Baytown and Beaumont refineries that it closed temporarily. Another area of focus towards the end of the year is typically what the company is expecting for capital expenditures, or capex, in 2018. Management set a capex budget of $22 billion for 2017, and in the second quarter reported it had spent $8.1 billion in the first half of the year. Over the same time period, XOM reported cash flow from operations and asset sales of $16 billion.

For the third quarter, XOM is expected to report earnings of $0.87 per share, up from $0.63 in the prior-year quarter, on revenue of $63.97 billion, according to third-party consensus analyst estimates. Revenue is projected to increase 9% year-over-year.

The stock hit $76.05 on August 18, a new low in 2017. After trading sideways from there to the start of September, the stock bounced back alongside the increase in oil prices and sharply higher gasoline prices and was trading around the mid-$83 level at the open today. The stock’s dividend yield has been around the 3.5% to 4% based on recent prices.

Options traders have priced about a 1.5% potential share price move in either direction around XOM’s upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term trading at the October 27 expiration, calls have been active at the 82 and 83.5 strike prices, while puts have been active at the 83 strike. As of this morning, implied volatility is at the 37th 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.

Chart showing YTD performance of XOM and CVX stocks compared to the S&P 500.

FIGURE 2: BOUNCING BACK IN Q3.

ExxonMobil (XOM) is charted above, and the purple line shows the year-to-date performance of Chevron (CVX), while the teal line shows the S&P 500’s (SPX) performance over the same time frame. XOM and CVX have bounced back since the start of August and moved sharply higher in the third quarter. Chart source: thinkorswim® from TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Chevron Earnings and Options Trading Activity

Like XOM, CVX’s management typically provides commentary regarding its key assets as well. With new CEO Michael Wirth taking over the role at the end of September, analysts might also be looking for any indication of changes he might be looking to make.

Some of CVX’s large projects are in Australia and the company has focused on expanding its liquefied natural gas, or LNG, operations in that country in recent years. In March this year, CVX announced all three parts of its Gorgon project that it owns a 47% stake in had been brought online. At the time, the first two parts were producing about 230,000 oil equivalent barrels per day. The company also just announced a few weeks ago its Wheatstone LNG project that it owns a 64.14% stake had started LNG production, with the first cargo on track to be shipped in the coming weeks.

CVX also has extensive operations in the Permian Basin, with roughly 2 million acres and an estimated 9 billion barrels of oil and equivalent gas, according to the company. In the third quarter, it did face a slight setback at its $6 billion petrochemical project that is a joint venture with Phillips 66 (PSX). CVX said that the plastics plant portion of the project has been completed, but the larger portion of the project will be pushed back to 2018, when it was originally expected to be completed this year, according to management.

For 2017, CVX set a capex budget of $19.8 billion and, at the end of the second quarter, reported it had spent $8.9 billion in the first half of the year. Over the same time period, CVX reported $8.9 billion in cash flow from operations.

For the third quarter, CVX is expected to report earnings of $1.00 per share, up from $0.68 in the prior-year quarter, on revenue of $33.80 billion, according to third-party consensus analyst estimates. Revenue is expected to increase about 12% compared to the same period last year.

The stock moved sharply higher during the third quarter, moving from a 2017-low of $103.04 at the start of July and was approaching the $120 mark by the end of September.  The recent recovery helped pushed CVX back into positive territory for the year and it’s up about 1.5% as of October 24, remaining close to its high of $120.22 it hit in mid-October. The dividend yield is about 3.6% based on the current price of $119.80.

Around CVX’s upcoming earnings release, options traders have priced in about a 1.5% potential share price move in either direction, according to the Market Maker Move indicator. There hasn’t been a whole lot of trading activity at the October 27 expiration. On the call side, the 119 and 120 strikes have been active and for puts the 115 strike has been the most active.

Looking further out at the November monthly expiration, most of the trading for both calls and puts has been concentrated at the 115 and 120 strikes. As of this morning, the implied volatility is at the 34th percentile.

Looking Ahead

The Energy Information Administration releases weekly crude oil inventories at 10:30 tomorrow morning, providing some economic data ahead of the earnings reports at the end of the week. Friday will also bring the next estimates of third-quarter U.S. GDP as well as well as the University of Michigan’s Consumer Sentiment Index. To find out more about what else is going on in the markets, check out today’s market update.

Good Trading,
JJ
@TDAJJKinahan

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