How To Play The Oil Majors In 2016

This week saw the first of the major multinational, diversified energy companies reporting earnings for the first calendar quarter of 2016. As expected, they have not been pretty in year on year terms, but, as I suggested last week may be the case, most have beaten the drastically cut analysts’ estimates for the quarter. BP (BP), Total S.A. (TOT), Conoco Phillips (COP) and Exxon Mobil (XOM) all had better than expected quarters, with only Chevron (CVX) missing.

Of course that doesn’t mean that everything in the garden is rosy. Most expressed caution, and even worry, about the rest of this year and, while beating expectations is obviously a good thing, all reported huge declines in both EPS and revenue from last year. It is interesting, though, that despite Q1 covering the period when WTI dropped as low as $26.05, only Chevron and Conoco actually reported a loss for the quarter. This indicates the benefits of integrated operations, where the steady cash flow from midstream and downstream business offset the losses from E&P when prices are low.

That is not the only bright spot either. Gloomy forecasts are the only way that CEOs of these companies can go given what has transpired over the last year or so, and reports of cutbacks in capital expenditure, layoffs and other cost saving measures have been the order of the day. In the darkness, however, there were signs of light. Total in particular hinted that they may be looking at improvement as the year progresses. They said in their report that they foresaw a 4 percent increase in production overall for 2016.

For investors this is significant in two ways. Firstly it indicates that Total’s production cuts came before oil hit what is increasingly looking like the bottom in February and that they are now beginning to step up into a rising market. Secondly, as OPEC talks of a freeze and the U.S., where Total has a smaller presence than most is still cutting back, it becomes clearer that Total’s maintenance of relationships in Iran, where production is ramping up, is beginning to pay dividends. That, and the fact that TOT saw one of the lowest year on year EPS declines at only around 40 percent suggests that they may be the best of the bunch for long term investors.

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For those with a shorter time frame and more of a trader’s mindset there is still one opportunity to buy in front of earnings looking for a good result and a quick pop in price. Royal Dutch Shell (RDS.A) will release their earnings early on Wednesday and, based on what we have seen so far, look like a decent buy in front of the numbers.

In general the European based companies have seen less drastic declines that their American counterparts and those with larger downstream operations have understandably fared better. Shell fits the bill in both cases so even though the stock has reacted positively to other earnings and is up around 50 percent from February’s lows, their filing could still be good enough to reward those who buy early next week.

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To sum up then, what we have learned from big oil companies’ earnings so far is that things aren’t as bad as they could have been. They have weathered the storm of oil in the $20s and most are still making money. Even more importantly in the eyes of many, dividends have remained intact. As Charles Kennedy reported on Oilprice.com earlier this week many people feel that that is unsustainable, but for the short term or swing trader with a few months’ perspective, long big oil is still a good position.