Stock Market Comment: Oil supermajors struggle amid low crude prices

• Earnings releases from 5 oil supermajors scheduled for this week

• Companies managed expectations ahead of report publications

• Slowdown in the global economy may put Shell’s $25 billion buyback programme at risk

• In spite of lower crude prices, operating cash flow of BP remained unchanged 

• Exxon Mobil (XOM.US) and Chevron (CVX.US) to report earnings on Friday

Stock traders around the world are focused on the ongoing Q3 earnings season. This week is especially interesting for investors trading shares of energy companies as 5 oil supermajors report their results. BP (BP.UK), Total (FP.FR) and Shell (RDSA.NL) have already reported their earnings while 2 US supermajors - Exxon Mobil (XOM.US) and Chevron (CVX.US) - will report theirs on Friday. 

Oil supermajors are expected to report third consecutive quarter of declining revenue on year-over-year basis. Combined revenue of European supermajors in Q3 2019 was over $30 billion lower than in Q3 2018. US supermajors are expected to report revenue that is almost $14 billion lower. Source: Bloomberg, XTB Research

One should not be surprised that earnings of energy companies were forecasted to drop - average prices of natural gas and crude oil were much lower than during the third quarter of 2018. However, market does not look at annual dynamics, at least not at first glance, but on how actual results compare to estimates. Supermajors did a good job managing expectations ahead of this earnings season - Exxon warned that it is likely to take $0.5 billion hit due to low oil prices, Shell warned that output is lower and BP hinted that it will take an impairment charge due to asset sale. Thanks to this, consensus estimates for earnings fell quite substantially over the past 4 weeks and it only made them easier to beat. 

Each European supermajor reported significant decline in earnings and revenue. However, thanks to good management of market expectations, BP and Shell delivered stellar earnings beats. Reports from Exxon Mobil (XOM.US) and Chevron (CVX.US) are scheduled for release ahead of US session open on Friday. Source: Bloomberg, XTB Research

BP (BP.UK) reported its earnings on Tuesday and managed to deliver a stellar 20+% earnings beat. However, the results are good only on the face of it as profit, adjusted for one-off factors, declined by almost 40% YoY. If we take into account one-off factors, like $2.6 billion charge linked to asset sale, the British oil supermajor actually reported first net loss in over three years. However, one thing that looks impressive in BP’s earnings report is its operating cash flow - in spite of a decline in oil prices, it has remained unchanged year over year. However, the share price of the company plunged during earnings call when BP’s Chief Financial Officer said it is premature to talk about dividend increase.

Share price of BP (BP.UK) plunged during earnings call when CFO said that discussion on dividend increase is premature. The company later explained that it simply did not discuss dividend increase, not that it is unlikely to make one. Nevertheless, the share price did not recover from the drop and remains close to the long-term support zone at £4.90. Slightly lower one can find 1.5-year low of £4.80. Source: xStation5

Earnings report from Total (FP.FR), released on Wednesday, showed the company's net income dropping 24% YoY. However, its EPS still came 9% higher than analysts’ median estimate. The French company said that, thanks to divesting high-cost assets, it is now able to cover spending needs at an oil price of just $25/barrel. At the same time, Total was increasing investment in the low-cost projects and the net effect was output increase of 8.4% YoY to 3.04 million barrels of oil equivalent per day. Similarly to BP, Total’s operating cash flow held quite steady relative to change in oil prices as it dropped only 3% YoY.

Royal Dutch Shell (RDSA.NL) managed to deliver a solid EPS beat and experienced the smallest annual decline in earnings among the European oil supermajors. Good results of the company can be ascribed to solid performance of oil and gas trading unit in the July-September period. However, Shell warned that slowing global growth is likely to have a negative impact on demand in the future and that its $25 billion buyback programme may not be completed in 2020 as expected. Share price declined significantly in response.

Royal Dutch Shell (RDSA.NL) pulled back following the second failed attempt of breaking above the resistance zone at 23.6% Fibo level of the downward move started in May 2018 (€27.20). Decline deepened today after the company warned that weaker outlook for the global economy may put its major buyback programme at risk. Today’s weak performance of crude price is only making things worse. The first support level to watch can be found at the €25.50 handle. Source: xStation5

The two US oil supermajors - Exxon Mobil (XOM.US) and Chevron (CVX.US) - will reported their reports tomorrow ahead of the US market open. Both companies are expected to report earnings decline outpacing drop in the crude price - earnings of Exxon are forecasted to be 54.1% YoY lower while Chevron is expected to report profit that is 39.4% lower than a year ago. Revenue decline for both companies is expected to be similar to the drop in oil price. What one may find interesting is the fact that, in spite of lower oil prices, both companies are expected to report higher earnings than in Q2 2019. It may suggest that analysts expect US supermajors to partially offset lower oil prices with good performance in downstream segment (refining and distribution), just as it was the case for Royal Dutch Shell.

Situation on the Exxon Mobil (XOM.US) chart is similar to the one on the chart of BP. Both stocks trade near key support zone, and both have been in a downtrend for some time already. However, Exxon trades near his zone before the earnings release, and in case its announcement is to be followed by a drop similar to the one European supermajors experienced, it may break to fresh 1-year lows. On the other hand, should Exxon surprise positively, the stock could move higher with 50-week moving average being the first level to watch (green line, $74.60). Source: xStation5