The Energy Sector: Bottoming or “Lower for Longer” ?

Since last September, ’14, the Energy sector has gotten crushed, and basic commodities have followed.

When this blog post was written in May ’15, the promise to readers was that you would be kept updated on the trend in Energy sector estimates.

Here are two spreadsheets that – thanks to Greg Harrison at Thomson Reuters – can be shared with readers:

1.This spreadsheet (FC – Energy Sector) shows the Energy sector by market cap weight last fall. (This s/sheet needs to be updated, but materially, I doubt if the relative weights have changed all that much).

Exxon-Mobil (XOM) and Chevron (CVX) are the lion’s share of the Energy sector, representing approximately 40% of the Energy sector’s total earning weight, and likely an equivalent market cap.

2.) This spreadsheet (FC – Energy estimate trends) shows how the Energy sector’s expected earnings growth (or earnings decline) has trended over the last 6 months, when looking at forward quarters.

The key quarters I’m focused on are the Q4 ’15, Q1 ’16 and Q2 ’16 quarters right now, since those quarters are lapping the collapse of the price of crude oil, and thus you would think if there was some hope for stabilization of crude oil, the forward estimates would start to reflect that expected growth.

Alas, that seems not to be the case. On the Energy estimate trends spreadsheet, Q4 ’15 and Q1 ’16 expected growth estimates are still declining about 3% per week, while Q2, ’16 is still deteriorating at a rate of 5% per week.

To see some erosion in forward quarters and forward estimates is not unusual, but to see it when readers should expect much easier comparisons thanks to the collapse of price of crude oil in Q4 ’14, leaves me uneasy.

Energy and commodities, given their incredible collapse the last few months, could bounce hard at any time, i.e. your proverbial violent, bear-market rally.

However the way I read the numbers and tea leaves, given the continued deterioration at a rapid clip in the forward estimates, for Q4 ’15 and into 1H ’16, crude still looks “lower for longer”. Some technicians now see a bottom for crude in the low $30’s.

What is interesting, looking at the stocks, is that Schlumberger (SLB), had a good quarter for Q2 ’15, and the stock is really trying to hang on to the upward sloping trend line in the low $80’s off the March, 2009 low. Halliburton too. Exxon reports its Q2 ’15 quarter on Friday, July 31, ’15. Looking at the “Energy Sector” link above, if readers would simply own Exxon-Mobil (XOM), Chevron (CVX), Schlumberger (SLB) and Halliburton (HAL), readers would own 51% of the market cap of the Energy sector in just those 4 stocks. (Long SLB, HAL)

If crude oil would break the December ’14 – January ’15 lows in the low $40’s, I might start to nibble into a few more of these names.

If I were to rank each of the above stocks for either a positive prospective return over the next 18 – 24 months, or outperformance within the Energy sector:

1.) Exxon-Mobil

2.) Schlumberger

3.) Halliburton

4.) Chevron

As always, this is just a personal opinion, and I write the blog posts as much to try and clarify and solidify my own thinking about an investment issue, than to persuade readers one way or another.

Thanks for reading.

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