Earnings Preview: Reports From ExxonMobil And Chevron Wrap Up A Busy Week

Energy giants Exxon Mobil Corporation XOM and Chevron Corporation CVX are scheduled to report earnings before the opening bell on Friday, Feb. 2. Heading into this quarter’s earnings season, the energy sector was expected to report the highest year-over-year growth in both earnings and revenue, according to FactSet, largely due to oil and natural gas prices weighing on results in the same period last year.

In a commodity-driven sector like energy, there’s not a whole lot companies can do when prices slump like they have with oil and natural gas over the past several years. Analysts have been growing more optimistic about the sustained rebound in energy prices since mid-2017 and oil prices recently hit a three-year high in January, supported by a combination of a weaker U.S. dollar, geopolitical concerns in oil-producing regions and OPEC’s continued efforts to control supply.

Still, energy prices have been choppy from one week to the next as investors and analysts digest inventory and production data. In the last couple of reports from the American Petroleum Institute, U.S. crude oil inventories climbed higher than analysts were expecting. In the most recent report, U.S. crude oil inventories increased by 3.229 million barrels and gasoline inventories increased by 2.692 million barrels.

Natural gas prices had also climbed higher at the start of 2018, but the March contracts for natural gas futures (/NG) got hammered over the past week of trading, dropping back below $3 amid warmer weather forecasts for the month of February.

In light of the rebound in oil prices, analysts have indicated they’ll be looking at pricing improvements in the supermajors’ upstream operations when they report, as well as potential updates to capital expenditure plans and which areas companies are focused on. Both CVX and XOM have announced plans in recent quarters to invest billions of dollars in the U.S. Permian Basin to ramp up production in the region.   

STILL LAGGING. Despite rebounds in oil prices, the energy sector trailed the S&P 500 (SPX) by a wide margin in 2017, and performance has varied among the supermajors. The chart above shows ExxonMobil (XOM) since the start of 2017, with Chevron (CVX) charted as the pink line and WTI Crude Oil Futures (/CL) as the teal line over the same timeframe. Chart source: thinkorswim^® from TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

ExxonMobil Earnings and Options Trading Activity

For Q4, XOM is expected to report adjusted earnings per share (EPS) of $1.07, up from $0.89 compared to last year, while revenue is expected to increase 17% year-over-year to $74.44 billion, according to third-party consensus analyst estimates.

After the recent passage of tax reform, XOM said it plans to invest more than $50 billion over the next five years to expand its business in the U.S. CEO Darren Woods said the company plans to invest billions in the Permian Basin in West Texas and New Mexico, as well as expand existing operations and improve infrastructure.

Options traders have priced about a 1.4% potential share price move in either direction around XOM’s upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility sits at the 92^nd percentile. 

In short-term trading at the Feb. 2 weekly expiration, trading has been a little all over the place on both the call and put side since there’s a short window between tomorrow’s report and expiration. At the Feb. 16 monthly expiration, calls have seen heavier trading at the 87.5 strike price, while activity has been lighter on the put side and spread out across strikes ranging from 85 to 90. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Chevron Earnings and Options Trading Activity

For CVX’s Q4 results, it’s expected to report adjusted EPS of $1.29, up from $0.22 compared to last year, and revenue is projected to increase 19% year-over-year to $37.55 billion, according to third-party consensus analyst estimates.

Options traders have priced about a 1.8% potential share price move in either direction around CVX’s upcoming earnings release, according to the Market Maker Move indicator. As of this morning, implied volatility is at the 68^th  percentile, not quite as elevated as some of the other energy stocks have been this earnings season. 

In short-term trading at the Feb. 2 weekly expiration, most of the activity for both calls and puts has been concentrated at the 125 and 126 strike prices, right at the money. At the Feb. 16 monthly expiration, most of the recent trading has also been heavier at the 125 and 126 strikes.

Looking Ahead

While this was the busiest week of the quarter for earnings reports, there’s still quite a few major companies across sectors left to report before things start dying down later in February. Next week, General Motors Company GM, Chipotle Mexican Grill, Inc. CMG, Walt Disney Co DIS, NVIDIA Coporation NVDA, Tesla Inc TSLA and Twitter Inc TWTR are just some of the names scheduled to release quarterly results.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.