Energy Sector in Q4 ’16: Should be First Positive Contribution to SP 500 Earnings in 6 quarters

The drop in crude oil this week, definitely got everybody’s attention as the SP 500 once again seems to be closely correlated with the trading of crude oil, causality or not.

This blog has been telling readers to watch Q4 ’16 Energy sector earnings growth estimates, since that is when Energy’s drag on the SP 500 earnings growth is expected to end.

As of this writing – Sunday, November 6th, 2016 – that is still the case.

Here is how Q4 ’16’s “expected” Energy’s earnings growth has progressed over the last 6 – 7 weeks: 

  • 11/04/16: +2.9%
  • 10/28/16: +1.4%
  • 10/21/16: -1.0%
  • 10/14/16: -0.1%
  • 10/7/16: +2%
  • 9/30/16: +1.6%
  • 9/23/16: +3.9%

Source: Thomson Reuters “This Week in Earnings”.

Note how after bottoming on 10/14/16, Energy growth for Q4 ’16 is slowly moving higher despite crude oil declining from $50 to the $44 this last few weeks.

Readers should recall – it was a year ago at this time – that crude oil plummeted from $50 to $28 per share by mid-January (see this chart). It was the first week of November ’15 that the crude oil slide started and it took about 10 weeks, into mid-January ’16 before it ended, with a near 50% drop over that time frame.

As the calendar moves forward, we are now lapping those “comp’s” for the next 10 weeks.

If you read last week’s blog here, note how it is the 4th quarter, 2016, where “SP 500 expected earnings growth” and SP 500 “expected earnings growth ex-Energy” become very close in growth estimation.

So, what’s the point ?

Even with the all the weeping-and-gnashing of teeth over crude oil volatility, the crude oil comp’s are very favorable over the next 8 – 12 weeks, and both revenue and earnings growth should be positive for the sector.

As an analyst, what I’m going to be watching now is how full-year, 2017 Energy earnings growth starts to change, particularly as we end 2016 and move into 2017.

Here is one final (what I found to be quite interesting stat from Factset in this week’s Factset “Earnings Insight”.

“Upward Change in Q4 ’16 EPS (4-quarter trailing), Top 10 SP 500 Co’s”:

  • Apache Corp: +155%
  • Halliburton Co: +138.5%
  • Netflix: +103.8%
  • Devon Energy: +85%
  • Baker-Hughes: +64.6%

Conclusion: four of the Top 5 strongest EPS revisions were Energy companies. Be careful though: using percentages, an upward revision from $0.10 to $0.20 in EPS is a 100% upward revision. Energy sector earnings were basically wiped out in the first half of 2016.

Energy comprises about a 8% – 10% weighting in client accounts, consisting of the XLE, IYE, OIH. It is hard to get away from the Exxon (XOM), Chevron (CVX) dominance of the sector. The IEO is one ETF without Exxon or Chevron in the Top 10 holdings, both of which saw mediocre earnings and revenue revisions after their October ’16 earnings reports.

Bottom-line for readers: don’t abandon Energy yet. Client’s overweight in Energy will remain and I may even add to it. It is really a 6-month trade right now (into Spring ’17), but as always things can change and positions can change at any time.

Next blog post is on the Health Care sector – a lot of damage done there, but so far the sector level earnings revisions aren’t terribly negative, surprising given some of the price action of the stocks. CVS reports this Tuesday, 11/8 – it is a combination of retail drug store and PBM, the PBM segment of which seems to be right in the crosshairs of Congress, post Epipen and Mylan.

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