What’s Next for Big Oil After an Uninspiring Earnings Season?

Last week, I wrote that while Q1 profits were expected to be down this year and energy stock prices were higher, that didn’t mean that energy wasn’t a place to be for long-term investors. Well, the big oil companies have now reported, so does that still apply?

The results have been mixed in terms of how the companies performed versus expectations. On Friday, April 26^th, for example, Chevron (CVX) and TotalEnergies (TTE) reported beats of analysts’ estimates for earnings per share (EPS), while Exxon Mobil (XOM) and Phillips 66 (PSX) missed expectations for the same metric. Then, on Thursday morning, the last of the big boys to report, Shell (SHEL), recorded a beat. None of the beats or misses were by much, so it is fair to say that oil company earnings in Q1 have been a bit uninspiring, but there have been some underlying themes.

First, while performance against expectations was mixed, profits on an outright basis showed big drops from the same quarter a year ago. Exxon’s bottom line was down 28% and Total’s 22%, with Chevron doing slightly better but still posting earnings that were 16% below Q1 last year. Crude is higher than it was a year ago and spent most of the first quarter climbing from just above $70 at the start of the year to close out the quarter at around $83, so clearly the drop in earnings is not down to the price of oil.

Rather, it is about the fall in natural gas prices. Gas around the world has been depressed by big surplus stocks and relatively mild weather in the second half of the winter, leading to the main US benchmark Henry Hub futures trading as low as $1.60, their lowest since the dark days of Covid in 2020. When you consider that the low at that time, when the global economy was completely shut down, was just a few cents lower than where it hit last quarter, the size of the glut of natty becomes clear.

Even so, economies aren’t shut down right now, so the kind of bounce off of those levels that we saw this week was always likely. From a personal perspective, however, I have been burnt a few times this year anticipating a bounce in natural gas, so I have stayed clear of trading long for any length of time. That looks like the right strategy, given that none of the firms that have reported have forecast a big bounce in natty any time soon. Most have actually been quite conservative in their forward guidance generally, suggesting that energy stocks overall will probably underperform the market for a while yet.

The only thing that might change that is the fact that almost all of the big oil companies are deploying some stored cash in one way or another. Exxon Mobil and Chevron are in the midst of high-profile takeovers of Pioneer and Hess, respectively, while Total and Shell both announced big share buyback programs in their earnings reports. If the acquisitions pass muster with regulators, that might give XOM and CVX a short-term boost, while buybacks and dividends always support a stock. However, there is a “double-edged sword” element to both of these things.

Takeovers are a form of consolidation, and consolidation tends to happen in shrinking, not growing, markets. Of course, from a decades-long perspective, a shrinking market in traditional energy is no great surprise, but the rash of M&A activity right now could be an indication that some of the big boys are expecting the effects of that to be felt before too long.

Share buybacks, as welcome as they are in so many ways, send the same message. A company that is really excited about the immediate future of its market can usually find much better uses for the cash it generates than buying its own stock, so doing that indicates a reluctance to invest in the future.

All in all, then, big oil earnings haven’t been encouraging for energy investors this quarter. Some companies beat forecast earnings, but those forecasts were for a big drop on an annular basis, so that is not particularly inspiring. And there are even signs of companies hunkering down for what they perceive as a risky outlook. Acquisitions can be seen as an investment in the future, but they can also be seen as the kind of consolidation that happens in a shrinking market. Meanwhile, returning money to investors is a good thing in the short term but shows a reluctance to invest.

All of that makes me a bit nervous about energy stocks over the next few months, so I will be trimming some existing positions and exercising caution before buying stocks in the sector for a while. In the long term, I am still bullish on big oil, but Q1 earnings suggest that there might be better entry points for their stocks before too long, so I will be patient for now.