Q1 integrated and refining results - key earnings drivers and guidance commentary

Apr. 20, 2022 3:49 PM ETVLO, BP, XOM, HAL, SA, TTE, CVX, PBR, SHEL, USO, SAA, SRS, OMVKY, SAAFY, PBF, PARR, EQNR, S, SEA:CABy: SA News Team6 Comments

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Integrated oil and refining stocks have seen mixed performance in 2022. The commodity markets have been broadly supportive of higher share prices; however, war in Ukraine has brought challenges for the sector. US-focused Chevron (CVX) has seen shares advance 47% year to date, while Total's (TTE) stock is broadly flat, given Russia-related risks. Refining-focused OMV (OTCPK:OMVKY) is down year-to-date because of Russian exposure, while US-based PBF (PBF) is up over 100%. Throughout Q1 results season, investors are likely to focus on a few key drivers of earnings and outlooks across the sector:

  • Strategy - BP (BP), Exxon (XOM) and others have announced plans to exit Russia; however, details of those plans remain unclear and adjustments to strategy in a "post Russia" oil investment world have not been broached - BP's (BP) plans for selling Rosneft will be a key feature of results, while investors will look to see how peers pivot capital spending plans outside of Russia.
  • Supply chains - Earlier Wednesday, Equinor (EQNR) and Petrobras (PBR) announced delivery of the Roncador project ahead of schedule and under budget; conversely, Haliburton (HAL) commented Tuesday that it's US onshore service business is largely "sold out" -- pushed project delivery dates or increased capital spending on the back of supply chain issues could result in share price underperformance.
  • Downstream strategy - during the pandemic-related downturn, both Shell (SHEL) and BP (BP) made plans to significantly reduce their refining footprints; conversely, Exxon (XOM) plans to deliver a new refinery on the gulf coast -- with refining margins hitting new highs, refining profits and capacity plans could drive dispersion in the stocks.
  • Trading - Total (TTE) previewed trading results for the quarter, flagging solid gains; however, extreme price volatility near quarter end could be a focus of BP's (BP) results, and the cause of a ~$600m derivative loss at Exxon (XOM) -- of note, Shell (SHEL) flagged significant cash outflows from its LNG trading business, on account of quarter-end price volatility.
  • Operations - Chevron's (CVX) TCO project saw a brief outage during riots in Kazakhstan early in the quarter, though its serial-underperforming assets at Gorgon appeared to operate well; as always, operational performance is a likely driver of results and share price performance this quarter.
  • Gas exposure - A significant potion of BP's (BP) gas is produced in Trinidad and sold under Henry Hub price-linked contracts; as a result, the high-cost gas has been a drag on earnings for much of the past decade; with US natural gas prices spiking, elevated exposure to the basin could be a tailwind for both BP (BP) and Exxon (XOM).
  • Refined products - while blended refining margins have hit record highs around the world, not all products have performed equally; distillate fuels like jet and diesel have led the blended margins higher, and distillate-heavy refiners like Saras (OTCPK:SAAFY), Valero (VLO) and Par Pacific (PARR) could see improved share price performance as international travel rebounds.

Oil prices (USO) are by far the most important driver of earnings for the integrated oil companies. And rising refined product margins will lift profits for all refiners. However, geographic and commodity end-market exposure could result in divergent performance this quarter. Distillate and henry-hub exposure could be the the focus of Q2 outlooks, with oil trading sideways of late. Companies able to operate well, and those over-exposed to improving commodity markets are likely to outperform throughout earnings season.

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