Look to sector’s big names for global demand clues

Slumping energy shares drove the recent US stock market selloff more than any other major group, so investors are turning to this week’s slate of earnings to see if the sector can pull itself out of the pit.

By Caroline Valetkevitch (Reuters)

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Published: Sun 26 Oct 2014, 9:46 AM

Last updated: Sat 4 Apr 2015, 4:52 AM

The third-quarter earnings picture for energy looks grim. Profit growth expectations for S&P 500 energy companies have fallen more than any other sector — from a forecast of 13.8 per cent on July 1 to the current 1.8 per cent, Thomson Reuters data showed.

Energy shares dropped 9.2 per cent in the third quarter, and the sector is on track for a decline of 3.6 per cent for 2014, the weakest performance of any S&P 500 sector.

The decline has followed a sharp drop in oil prices, dragged down by weakening global demand and a rising dollar. With various names due to report this week, including Exxon Mobil, Chevron, ConocoPhillips and National Oilwell Varco, there are hopes that executives will suggest that the fall in oil and share prices has overstated the outlook for these names.

“It isn’t just about these particular companies. What they have to say is an important factor for the entire global demand story,” said Quincy Krosby, market strategist at Prudential Financial, based in Newark, New Jersey.

“All the market has been looking for is less bad news.”

The energy sector over the last 20 weeks has spiralled from being the market leader to now ranking as its most distant laggard, according to a Relative Rotation Graph study, which analyses the relative performance of the constituents of an index.

The S&P energy sector up about six per cent from October 15, while the S&P 500 is up 5.5 per cent from its October 15 low and the benchmark index on Friday posted its best weekly gain since early January 2013.

Some analysts expect demand from North American energy and construction industries to boost performance for some in the sector going forward, even with peaks in activity in North Dakota and other areas. And with profit estimates down for energy, its price-to-earnings multiple is among the lowest for S&P 500 sectors, at 14.3 times estimates earnings, Thomson Reuters data showed.

“Sure these oil companies may have some price pressure...but longer term, many of them are going to be just fine,” said Robert Lutts, chief investment officer at Cabot Money Management in Salem, Massachusetts.

Still, estimates for the fourth quarter and 2015 so far show an even bigger decline in energy’s profit outlook.

S&P 500 energy earnings now are expected to decline 4.3 percent in the fourth quarter, which is down from a July 1 forecast for 10.4 per cent growth, Thomson Reuters data showed.

For 2015, profit growth for the sector is estimated at just 1.8 percent, the weakest of any sector. That compares with a forecast of 11.1 percent growth for the entire S&P 500, Thomson Reuters data showed.

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