The Energy sector will be a focus for the market this week, as Exxon Mobil and Chevron are scheduled to report earnings on August 2. Despite a 9.7% year-over-year increase in the average price of oil in Q2 2024 relative to Q2 2023 ($80.66 vs. $73.56), the Energy sector is reporting the third-largest (year-over-year) earnings decline of all eleven sectors in the S&P 500 for Q2 2024 at -0.8%.
It is interesting to note the Energy sector has also seen the largest decline in earnings of all 11 sectors since the end of the second quarter. On June 30, the estimated earnings growth for the Energy sector for Q2 was 13.3%. Today, the sector is reporting a year-over-year decline in earnings of -0.8%. This decrease in earnings is mainly due to analysts lowering Q2 earnings estimates for companies in the Energy sector since June 30, led by Exxon Mobil (to $2.03 from $2.37), Marathon Petroleum (to $3.22 from $5.07) and Chevron (to $2.93 from $3.27).
Despite the decline in earnings over the past month, four of the five sub-industries in the sector are reporting year-over-year growth in earnings: Oil & Gas Exploration & Production (21%), Oil & Gas Equipment & Services (18%), Oil & Gas Storage & Transportation (8%), and Integrated Oil & Gas (7%). On the other hand, the Oil & Gas Refining & Marketing (-52%) sub-industry is the only sub-industry in the sector reporting a year-over-year decline in earnings for the quarter.
Looking ahead for the sector, analysts are predicting earnings growth starting in 2025. For Q3 2024 and Q4 2024, analysts are calling for earnings declines of -7.1% and -1.6%, respectively. For Q1 2025 and Q2 2025, analysts are expecting earnings growth rates of 14.4% and 24.8%, respectively.
FactSet Senior Energy Analysts Connor McLean and Trevor Fugita provided commentary on key trends to watch during this earnings season related to the energy sector.
Connor McLean highlighted key themes related to oil and gas prices. (View more energy commentary from Connor.)
“Sentiment around natural gas pricing has become increasingly bearish as the US gas market struggles to shake off surplus storage inventories. Strong gas generation in the power sector driven by hot summer temperatures has been offset by underperformance in LNG exports and the return of gas production curtailed at the beginning of Q2. While new LNG demand (Plaquemines LNG and Corpus Christi Stage 3) is expected to provide some support for pricing this winter, excess gas in storage is likely to continue to weigh on cash pricing into 2025. Compounding the bearish outlook for US natural gas, US crude pricing is poised to remain strong entering the second half of 2024. Despite recent inventory builds, WTI continues to trade near $80/bbl supported by low storage inventories and global supply concerns. With global demand expected to pick up next year, pricing should remain constructive for increased domestic drilling activity in 2025 leading to an increase in both crude oil and associated gas production in the US.”
Trevor Fugita discussed key trends to watch related to growing power generation and demand.
A 4% increase in load year-over-year has led to new milestones in the power sector. Most notably, the U.S. set a daily record for natural gas generation on July 9th at 6,907 TWh. Sustained hot temperatures should continue this trend of increased loads, improving the short-term outlook for natural gas consumption. Over the long-term, coal retirements continue to pose upside potential for natural gas generation, with 15.3 GW of operational coal-fired units planning to retire by the end of 2025. However, the buildout of new solar facilities is far outpacing the growth seen in 2023. 13.8 GW of new solar capacity has come online in 2024, compared to 19.1 GW in all of 2023. With an additional 24.0 GW of solar capacity under construction and scheduled to come online before the end of the year, solar generation should continue to rise and pose both short and long-term risks to the outlook of natural gas consumption.
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