Don't spend your energy (profits)

May 26, 2017 02:35 PM
Crowd-sourced earnings estimates from Estimize consistently outperform Wall Street.

A perfect storm of macroeconomic events during the last three years resulted in increased volatility in the energy sector. What began as a seemingly insignificant downturn in the summer of 2014 turned into the cratering of the energy markets by the summer of 2015, particularly crude oil.

Plummeting oil prices led the S&P 500 Energy Sector to drag down the entire index, hitting its lowest point in the first quarter of 2016 with year-over-year returns plummeting 109% (see “Low energy, below”). As global demand weakened, the U.S. dollar began to make its ascent and commodities got increasingly more expensive.

Energy is, of course, highly correlated to other industries such as materials and industrials, which also took a hit during this time, but at a fraction of the magnitude of the energy sector.

On the bright side, other sectors benefited, although not enough to offset the lagging sectors. Lower prices at the pump translated to more money in consumer’s pockets, which not only lead to increased consumer sentiment but helped companies in the consumer discretionary space such as retailers, restaurants, hotels and autos. Even Industrials such as airlines and transports benefited. 

However, falling fuel prices didn’t benefit the retail space as much as initially thought, as a major shift in consumer spending began to take hold. Many consumers have changed the way they spend their discretionary income, allocating a larger portion to technology, health care and services; not to traditional outlets such as apparel and accessories.

While energy prices were well on their way to making a comeback, the election bump in November fueled by President Trump’s pledge to roll back regulations, particularly in the energy space, certainly sped up the recovery. Toward the end of 2016, energy started to revive, boosted by an agreement from OPEC nations, and even non-OPEC nations such as Russia, to collectively cut output by 1.8 million barrels a day, equaling around 1% of global supply.

In addition, oil and gas companies couldn’t have a better advocate in the White House than former Exxon Mobil (XOM) CEO Rex Tillerson, as the newly appointed Secretary of State. This helped catapult oil above the $50 per barrel mark and has many experts believing it will rise and stay above $60 throughout the year. 

In 2017, energy earnings are anticipated to top the nearly 300% growth based on improving oil prices and easier comparisons on earnings. Some of the names expected to get us there come from both industries within the sector. Within energy, gas and consumable fuels, the Estimize community is expecting the highest growth rates to come from the likes of Chevron (CVX), Range Resources (RRC) and Cabot Oil (COG), to name a few. All are expected to post triple-digit year-over-year earnings-per-share growth and double-digit revenue growth. For energy equipment, some expected winners are Baker Hughes (BHI), RPC Inc. (RES) and Technip FMC (FTI). 

However, some analysts now say these expectations may have been too lofty, resulting in large downward revisions for many of these names. It’s not energy that is seeing the deepest cuts to 2017 earnings estimates, but its two most highly correlated sectors. Materials and industrials are currently receiving the largest downward revisions of any of the 11 sectors within the S&P 500 for the second half of 2017; potentially foreshadowing a rude awakening is in store for global macroeconomic growth later this year.


About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ. @Estimize