Impact of Lackluster Earnings on XOM and CVX -- What's Next for the Energy Stocks?

Oil behemoths Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) recently reported third-quarter results, indicating enduring difficulties in accelerating oil production growth. Earnings have significantly dropped from the year-ago quarter, failing to meet the Wall Street projections. Nonetheless, both firms reported an upswing in earnings quarterly.

XOM's oil production has tumbled, while CVX has faced setbacks impacting key growth endeavors in Kazakhstan and the major hubs of oil production, including the Permian Basin in West Texas and New Mexico.

The market reaction to the earnings reports was swift and severe. CVX’s shares plunged about 7%, and a descent of 1.9% in XOM's shares was observed despite rising oil prices due to escalating tensions in the Middle East. This response underscores investor anxieties about these fossil fuel behemoths' long-term viability and fiscal discipline relative to sectors like technology.

Both companies confirmed technical issues in the Permian region, including constraints on wastewater production, high concentrations of carbon dioxide in natural gas, and challenges encountered by production partners during fracking operations. The complications of oil production expansion, coupled with operational problems, are anticipated to influence a surge in industry-wide costs.

However, not all seems grim for the oil corporations. The oil majors are reportedly amplifying their capital investments within the oil and gas sector, undeterred by growing global consensus on a shift towards clean energy alternatives. The acquisitions underscore the enduring interest of the oil companies in profitable oil and gas ventures.

These strategic moves suggest that these corporations do not anticipate a decline in oil demand in the future. Instead, they lean toward believing that oil's role will remain pivotal in the world's energy matrix for the foreseeable future.

The International Energy Agency's (IEA) forecast of oil demand peaking by 2030 amid expanded use of renewable energy sources. The prediction undermines the justification for increased expenditure on fossil fuels and further prompts the question of why cash-rich oil titans are not pivoting toward green energy ventures.

The answer lies partly in the clean energy transition being a long-term, costly process, complicated further by the current economic backdrop of persistent inflation, escalating borrowing expenses, and continual supply chain difficulties.

For the past two years, geopolitical instability – from Russia's military aggression in Ukraine to long-standing conflicts in the Middle East, has fostered unpredictability in energy prices. This has prompted concerns over energy demand, infusing uncertainties in the market. Additionally, easing oil and natural gas prices has exacerbated the profitability challenges of XOM and CVX.

A cautious approach has pervaded the market, with participants adopting a vigilant stance, awaiting the outcomes of pivotal events, including the U.S. Federal Reserve policy meeting and China’s latest manufacturing data.

In its most recent Commodity Markets Outlook, the World Bank projected global oil prices to reach around $90 a barrel during the last quarter of the year before diminishing to an average of $81 a barrel throughout the coming year as global economic growth decelerates. Such a decline could cast a shadow over the financial health of XOM and CVX.

These corporations, heavily vested in the extraction and sale of oil and gas, stand at risk of substantial revenue reductions, which could compromise their net profitability. Dwindling prices could pose formidable challenges for these companies in securing funds for new ventures and investments, jeopardizing their future profitability.

On the flip side, however, OPEC+ and Russia’s prolonged production cuts, in addition to the geopolitical turmoil, could exacerbate supply chain disruptions, propelling oil and gas prices in the future. This development creates a conducive climate for extraction and ensuing production activities.

Let’s see some other factors that have the potential to influence the stocks’ performance in the near term:

Exxon Mobil Corporation (XOM)

With a market cap of over $419 billion, XOM explores and produces crude oil and natural gas in the United States and internationally.

The cash influx enabled XOM to authorize a $60 billion acquisition of Pioneer, which attracted international media attention. Experts predict the strategic maneuver could boost XOM's domestic oil production twofold, catapulting the company into the top tier of American producers. It could stimulate added consolidation within this fragmented sector, strengthening American shale producers' role as the commanding players in the international oil market.

However, XOM's third-quarter profits fell by over half of its record high last year due to a decline in oil and gas price realizations, although the company's refinery throughput rose to 4.2 million barrels a day, the most since XOM merged with Mobil 24 years ago. The energy giant’s revenue slid 19% year-over-year to $90.76 billion, while non-GAAP earnings per share reached $2.27, falling short of analysts' predictions.

The dwindling profits were influenced by an approximately 60% decrease in natural gas price realizations and a 14% reduction in oil price realizations. The company also reported a 69.9% decline in earnings from its chemical products division due to increased feedstock prices and overproduction.

In the quarter, it returned $8.1 billion to the shareholders, comprising $3.7 billion in dividends and $4.4 billion in share buybacks.

Moreover, XOM announced an increase in its fourth-quarter dividend to $0.95 per share, payable on December 11, honoring its excellent history of shareholder returns. A testament to the company's reputation is its consistent record of paying dividends for 40 uninterrupted years.

Its annual dividend rate of $3.80 per share translates to a dividend yield of 3.60% on the current share prices. The company’s dividend payouts have grown at a CAGR of 1.5% over the past three years and 2.7% over the past five years.

The stock trades lower than the 50-, 100-, and 200-day moving averages, indicating a downtrend. However, Wall Street analysts expect the stock to reach $128.32 in the next 12 months, indicating a potential upside of 21.6%. The price target ranges from a low of $105 to a high of $150.

Institutions hold roughly 60.4% of XOM shares. Of the 3,637 institutional holders, 1,589 have increased their positions in the stock. Moreover, 147 institutions have taken new positions (9,154,521 shares).

For the fiscal fourth quarter ending December 2023, analysts expect its revenue and EPS to be $92.28 billion and $2.20, respectively.

Chevron Corporation (CVX)

Boasting a market cap of over $275 billion, CVX offers administrative, financial management, and technology support services for energy and chemical operations.

The firm's recent $53 billion acquisition of Hess, recognized as one of the largest operators in North Dakota's Bakken shale play, substantiates its massive investment amid the global shift towards cleaner energy. Even though this transaction could slightly increase the region's oil production, industry analysts do not anticipate a revival to its peak pre-pandemic boom days.

Bakken oil production is anticipated to drop to 1.15 million bpd from 2026 and remain stagnant until 2030. A slow decay will follow this due to depleting reserves. It is yet to be ascertained if an infusion of new investments or technological advancements can counteract a longer-term decrease in Bakken output.

CVX also emphasizes the importance of consistent dividend distribution, demonstrating an unwavering commitment to operational diversity, having done so for an impressive 35 consecutive years. This reliability is quite remarkable considering the unpredictable nature of the energy sector.

In 2023, the company paid a dividend of $6.04 per share, which translates to a dividend yield of 4.18% on the current share prices. The company’s dividend payouts have grown at a CAGR of 5.6% over the past three years and 6% over the past five years. Although, it is worth noting that the decline in dividend payout rate over time might adversely influence investors seeking a steady source of passive income.

CVX adopts a moderate approach concerning leverage. During periods with low oil prices, the company can incur debt to finance its capital investment needs and maintain dividend payouts. When energy prices rebound, which historically they always have, the company can offset the debt. This prudent strategy offers reassurance to even the most conservative investors about the integrity of the company's dividend capabilities.

For the fiscal third quarter that ended September 30, 2023, CVX's upstream production segment earnings dipped 38.2% year-over-year to $5.76 billion. However, it increased only 16.6% from the second quarter, despite the substantial increase in oil prices.

Profit in CVX's non-U.S. production segment, accounting for about two-thirds of its total output, declined 37.7% year-over-year but increased about 12% quarterly. Its U.S. production earnings increased 26.4% quarterly but declined 39% year-over-year.

The U.S. net oil-equivalent production was up 20% year-over-year and set a new quarterly record, primarily due to the acquisition of PDC Energy, Inc., which supplemented the quarter's output with an additional 179,000 oil-equivalent barrels per day, and net production increases in the Permian Basin.

The stock trades lower than the 50-, 100-, and 200-day moving averages, indicating a downtrend. However, Wall Street analysts expect the stock to reach $189 in the next 12 months, indicating a potential upside of 30.9%. The price target ranges from a low of $166 to a high of $215.

Institutions hold roughly 71.4% of CVX shares. Of the 3,473 institutional holders, 1,718 have increased their positions in the stock. Moreover, 203 institutions have taken new positions (9,253,853 shares).

For the fiscal fourth quarter ending December 2023, analysts expect its revenue and EPS to come at $54.46 billion and $3.68, respectively.

Considering the oil stocks’ tepid price momentum, mixed analyst estimates, and financials, it could be wise to wait for a better entry point in the stocks.

Natural Gas: Opportunity of the Year?

It's difficult to imagine that this energy commodity could offer a promising opportunity for profit when you observe its performance across different timeframes, including yearly, half-yearly, and even year-to-date. Below is a chart displaying its performance over the course of one year.

NG Futures 1Y Performance


Natural gas futures have performed the worst among all commodities on the mentioned timeframes, losing 73% of their price in one year. They are almost double the percentage loss of the next worst-performing commodity, oats futures.

The chart below sheds light on the poor performance of natural gas futures. Continue reading "Natural Gas: Opportunity of the Year?"

Natural Gas Opportunity For Savvy Investors

On August 31st, Russia's state-owned energy company, Gazprom, stopped the flow of natural gas in the Nord Stream 1 pipeline. The pipeline ran from Russia to Germany and was scheduled to be discontinued from August 31st until September 3rd. But September 3rd came and went, and the pipeline remained shut down.

At first, an oil leak was reported, causing the pipeline to remain shut down. But then, it was evident that the shutdown was in retaliation to the sanctions the West had implemented against Russia due to the war in Ukraine.

Many experts predict the economic pain in Europe will increase as the cold weather sets in across the continent. Some have gone as far as to say that the economic pain will be felt in both the coming winter and next winter, 2023-2024. Some are even saying that energy rationing will be required to ensure everyone has enough natural gas for heating.

However, many in Europe have been planning for this to occur for some time. Russia had reduced the pipeline operating volume to just 20% of what it could provide.

This was far less than what Europe comfortably needed to make it through winter. Thus, the European Union and other entities have been working on replacing the lost volume through other means. So while the pipeline shutdown is not ideal, it was predicted to happen at some point this winter.

Many are saying Russia is attempting to weaponize its gas supply to hurt the EU and other nations in an attempt to have Western countries drop or reduce sanctions against Russia.

At this time, there is no sign that either the EU or Russia will bend to the will of the other, and it is likely that we will continue to see elevated oil and gas prices in Europe. Thus, comes the opportunity for savvy investors.

I want to note that I am not condoning an attempt to profit from someone else's pain and suffering. I want to point out the high likelihood that natural gas prices will likely increase this winter as the EU finds ways to replace the gas they acquired through the Nord Stream 1 pipeline.

With that all said, let's look at a few of the options you have if you want to invest with the idea that gas prices will rise this winter. Continue reading "Natural Gas Opportunity For Savvy Investors"

Chesapeake Energy All in on Natural Gas

Forget oil—the real money is in natural gas.

Or at least that’s the message coming from a pioneer of the U.S. shale revolution, Chesapeake Energy (CHK).

From Prince to Pauper to Prince Again?

Once upon a time—when its stock was valued at more than $35 billion and its CEO, Aubrey McClendon, had the biggest pay package of any CEO of a listed firm—Chesapeake Energy was America’s best-known fracker.

But those glory days disappeared quickly, and Chesapeake became the poster child for the shale sector’s excesses.

About a year and a half ago, in the autumn of 2020, Chesapeake was in the midst of bankruptcy proceedings after the coronavirus pandemic-led crash in energy demand proved to be the final straw in the company’s fall from grace.

And for the industry more broadly, the prospects for liquefied natural gas (LNG) exports were looking bleak after a $7 billion contract to supply the French utility Engie went down the tubes on concerns over the emissions profile of U.S. natural gas.

Fast forward to 2022 and the picture has changed dramatically. Natural gas exports are booming!

Thanks to the Russian invasion of Ukraine and subsequent sanctions, Europe is in the middle of an energy crisis. It is buying up as much American LNG as it can. Those concerns about emissions are long forgotten.

In the first four months of the year, the U.S. exported 11.5 billion cubic feet a day of gas in the form of LNG, an 18% increase from 2021. Three-quarters of those exports went to Europe. And European leaders have pledged to ratchet up their imports by the end of the decade. There is also a massive opportunity in Asia, where LNG demand is set to quadruple to 44 billion cubic feet a day by 2050, according to a recent report released by think-tank, the Progressive Policy Institute.

And even here in the U.S., natural gas supplies look set to be tight this winter. Hot summer weather and high demands for power generation are sucking up supplies and leaving storage precariously low. Continue reading "Chesapeake Energy All in on Natural Gas"

Chart Spotlight: Tellurian Inc. (TELL)

Natural gas prices are exploding.

For one, Russia said it would cut natural gas shipments to Europe.

In fact, as noted by Barron’s, “Russian company Gazprom said on Monday that it will cut natural gas shipments from the key Nord Stream pipeline to Germany starting this week. The pipeline’s exports will be cut to 20% of capacity, down from 40%, because of a sanctions-related issue with turbines serving the pipeline.”

Two, there are drought conditions in the U.S., and a heat wave forcing millions to turn up their air conditioners to full blast.

Three, according to EQT CEO Toby Rice, as quoted by Barron’s, “In the United States, we’ve got the natural gas here, we’ll be fine. But you think about our allies in Europe, and the tremendous power and influence that Russia has on these countries. Clearly, we need to take away the gun, and provide the energy to our allies around the world.”

All could create a big opportunity for natural gas stocks, like Tellurian (TELL).

Tellurian – a $2.1 billion company – is “building a low-cost, global natural gas business, profitably delivering natural gas to customers worldwide.”

Better, the company could benefit from a substantial shortage of natural gas.

In fact, according to its latest investor deck, geopolitics and energy security providing a step change in global LNG demand. Tellurian notes there’s (1) underinvestment in energy and post-CV structural growth have collided with a geopolitical crisis; (2) A need to replace 20 Bcf/d of Russian gas to Europe, equivalent to ~35% of the world’s LNG market; (3) Natural gas shortage expected to lead to catastrophic consequences.

Technically, according to MarketClub, shares of TELL are slightly overbought. The MarketClub Smart Scan also gives the stock a score of +60, which tells us at the moment, the stock is struggling to move in a solid trend.

However, with natural gas prices showing no signs of cooling off, I’d like to see the stock run from a current price of $3.68 to $5, near-term.

The MarketClub Trade Triangles are also mostly green.

While it’s telling us that the longer-term trend has been down over the last month, the intermediate trend has been strong since mid-July. In addition, the short-term trend, according to Market Club, has been up since mid-July as well.

TELL Chart with Trade Triangles

Source: MarketClub

Ian Cooper Contributor

The above analysis of Tellurian Inc. (TELL) was provided by financial writer Ian Cooper. Ian Cooper is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Ian Cooper expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.