Remaining A Nervous Energy Bull

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Includes: CVX, HAL, IYE, OIH, SLB, XLE, XOM
by: Brian Gilmartin, CFA

Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) reported their Q2 2016 financial results last Friday. The results -- particularly Exxon's -- took some of the shine off the forward estimates of the energy sector that were, in fact, looking quite good as we head into the second half of 2016.

Q4 2016's energy sector earnings growth had been looking pretty good week after week, as I noted when I updated this blog each Saturday. Take a look at this spreadsheet: FC - EnergyEst8216PostExxon.

The first block highlighted is the trend in Q4 2016 estimates. Note the sharp drop in Q4 2016 growth between July 29 and Monday, Aug. 1, 2016.

As soon as Exxon's numbers hit the wires Friday morning, July 29, my first thought in terms of the sector earnings revisions was: "This won't be good." That turned out to be an accurate, off-the-cuff assessment. After writing about energy and basic materials on July 23, knowing Exxon and Chevron were poised to report their Q2s, I was convinced the energy sector would continue to outperform into the back half of 2016.

While there is a little more anxiety over the sector given the trend in crude oil and Exxon's and Chevron's numbers, note the bottom half of the above-linked spreadsheet. Exxon's numbers and expected growth in 2017 didn't budge at all with last Friday's huge miss.

The other aspect to the Exxon forward estimates is that forward revenue growth is improving far faster than EPS. Exxon's 2016 revenue growth -- despite last Friday's horrid miss -- is still showing steady improvement. Here is the recent Energy sector revenue growth history:

  • Q2 2016: -24.7% (as of Aug. 1, 2016)
  • Q1 2016: -29.6%
  • Q4 2015: -35.4%
  • Q3 2015: -35.9%
  • Q2 2015: -31.7%
  • Q1 2015: -34.7%
  • Q4 2014: -13.5%
  • Q3 2014: -2.6%
  • Q2 2014: +3.3%

The bottom sure looks to be in as Energy sector revenue is still deteriorating, but at an improving rate.

Conclusion

Remember, there is a difference between the commodity crude oil and energy stocks. The projected revenue and EPS growth, even if it is just half of what is expected, is still a healthy rate of growth.

What makes me nervous? Gasoline consumption drives about half the demand for U.S. crude oil distillation. Electric cars, better mileage, aluminum trucks, etc. all are poised to reduce the demand for gasoline over the next five, 10, and 20 years.

Exxon, Chevron, Schlumberger (NYSE:SLB), and Halliburton (NYSE:HAL) are the lion's share of the energy sector's revenue and EPS. All these stocks remain above their 200-day moving averages, and the technicals have improved nicely since the Q1 2016 bottom.

The sentiment around the sector is pretty uniformly bearish with the July drop in crude oil. My plan is to hold the ETFs mentioned in the disclaimer below into 2017 and evaluate the earnings results each quarter. However, the positions can change at any time.

Disclosure: Long XLE, IYE, OIH for clients, with a small position in XOM directly.