What to Expect From Big Oil This Earnings Season

Next week, most individual investors will be focused on tech earnings. Microsoft (MSFT) and Alphabet (GOOG: GOOGL) will report on Tuesday, followed by Apple (AAPL), Amazon (AMZN) and Meta (META) on Thursday, meaning that five of the so called "magnificent seven" will grace us with their performance reports over just a couple of days. Obviously, given the enormous weighting those stocks have in both indices and most people's portfolios after recent massive outperformance, that is important.

Still, some people, including probably most of the readers of this particular newsletter, will be focused elsewhere. Three "big oil" companies will also report next week: Shell PLC (SHEL) on Thursday, followed by Exxon Mobil (XOM) and Chevron (CVX) on Friday. In the interest of full disclosure, I should say that at the time of writing, I own SHEL and CVX. The former is a long-term position that I will certainly still have when you read this and when the earnings come out, while the latter is a trading position initiated on the drop below $142 on January 18^th. The initial intention was to cut that before the release next week, but I have recently changed my minds about that and will probably hold it through earnings. I also intend to buy CVX before they report.

So, what changed my mind? What can energy investors expect from those earnings and the subsequent investor and analyst calls?

Basic expectations can be easily assessed based on the consensus estimates from Wall Street analysts for earnings per share (EPS). In all three cases, those estimates suggest quite large drops in profits from a year ago. SHEL is forecast to show EPS of $1.94. down from $2.76 in the same quarter last year, XOM $2.22 down from $3.40, and CVX $3.31 versus $4.09 in Q4 2023.

That pessimism is mainly due to the perception of low oil prices in Q4 of last year but, if you look at the chart, the average selling price during the respective Q4s is probably not much changed for the big oil companies. The fact that crude dropped below $70 a couple of times in Q4 2023 and finished the year falling out of bed creates the impression of a bad quarter, but prices were above $85 for all of September last year, so the average for the quarter won't be too far off what it was in the same three months of 2022.

On that basis, a beat by all three big oil companies next week would really come as no surprise. However, this time around the actual results will be far less important in terms of the market reaction than the commentary offered by the management teams regarding the future. The recent news on that front has been positive on a couple of fronts.

Earlier this week, the Chinese central bank surprised markets by announcing a cut in the required reserve ratios for the nation's banks. That may seem a bit obscure and wonkish to some of you, but it is probably much bigger news than the limited news coverage in the West would make you believe. It will immediately free up around a trillion yuan of liquidity but more importantly, it signals a willingness by Chinese authorities to do what it takes to support the economy and markets there. That is a big deal given that China is second only to the US in oil consumption.

Then, here in America, we saw a quite remarkable GDP report on Thursday morning. US GDP grew by a much higher than expected 3.3% in Q4 of 2023 and that growth was achieved with core PCE, the Fed's favorite measure of inflation, rising only 2% on an annualized basis. That is a massive drop from last year and is also right at the Fed's long-term target. All of the talk over the last six months or so has been about whether inflation can be tamed, and if so, how much pain will have to be inflicted on the US economy to achieve that aim. Thursday's report indicates that the answers to those questions are "yes" and "none". If that can be achieved it would be one of the most spectacular Fed policy successes in history, but a "soft landing" now looks not only possible but extremely likely.

So, with good news regarding demand in the world's two largest oil markets, the only thing that will temper the enthusiasm of SHEL, XOM, and CVX when they give commentary and forward guidance is the supply situation. Despite the Red Sea issue and the OPEC+ cuts, there is still a glut of oil in the world, and one could argue that oversupply continues. However, it is only oversupply if demand fits current forecasts, and growth in both the US and China suggests that those forecasts could be too low. Big oil companies will be all too aware of that so, while they are not exactly known for hyperbolic enthusiasm when it comes to guidance, a more positive tone than most are forecasting should be expected.

I should point out that, with the exception of my position in SHEL which I have held since 2020 and have no intention of selling, these are short-term trades rather than long-term buys. The longer-term outlook for oil is still too uncertain for me to be piling into big oil stocks right now and holding big positions.

Of course, trading in front of earnings is always a risky proposition, but with reasons to believe that both Q4 earnings and the outlook and guidance from SHEL, XOM, and CVX could easily be positive for the stocks, I will be going into those releases next week long all three, using some of the cash I freed up last week by selling TSLA in front of their earnings. Whether you took that trade or not, you may want to consider doing the same.