Recession fears have weighed on the energy sector over the last month, and oil prices briefly dipping below $100 per barrel (bbl) last week further pressured energy stocks. Despite volatile trading, the fundamentals for many energy companies have not changed as much as the sell-off would suggest, and earnings estimates have largely moved higher over the last month.
Earnings results for 2Q22 should be extremely strong for energy companies broadly given the macro backdrop during the quarter and high commodity prices. Severe weather in the Mid-Continent may have a negative impact on some operators, but there are not likely to be many flies in the ointment this quarter. The chart below shows some of the largest names in each energy subsector and compares performance over the last month with 2022 EBITDA estimate revisions. Consensus forecasts have generally moved higher, particularly for refiners, but equity values are off by double-digit percentages. Admittedly, sell-side analysts will probably update numbers this week, but estimates will likely be increasing.
Aside from earnings expectations, the outlook for measured US production growth remains intact. Oil’s move from ~$120/bbl a month ago to $96/bbl at the intra-day low last week has not altered producer plans. Similarly, natural gas prices fell from $9.32 per Million British thermal unit (MMBtu) on June 6 to $6.30/MMBtu on July 7 largely due to an extended outage at Freeport LNG but remain very attractive when viewed in the context of recent history. Exploration and production companies (E&Ps) are generating strong cash flows at these prices, which will be evident as companies report 2Q22 results. The same signal to grow production is in place at $96/bbl or $120/bbl, and the Baker Hughes US rig count is up 19 rigs from June 10 to July 8. That said, most public producers are only growing modestly in any event given firm commitments to capital discipline.
Recession fears have pressured the energy space, but fundamentals have not changed nearly as much as recent weakness would suggest. A recession could certainly weigh on energy stocks as lower oil demand tends to result in lower oil prices (read more), but for investors anticipating a soft landing, the recent weakness could be an opportunity. Earnings season may help shift the momentum as companies report solid results and showcase investor-friendly initiatives, namely buybacks and generous dividend policies supported by strong free cash flow generation.
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