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What's in the Cards for Chevron (CVX) this Earnings Season?

U.S. energy giant Chevron Corp. CVX is expected to release first-quarter 2016 results before the opening bell on Friday, Apr 29.   

In the preceding three-month period, the San Ramon, CA-based superpower delivered a 164.58% negative earnings surprise. Moreover, the company posted an average miss of 28.73% for the trailing four quarters amid weak oil prices.  

Let’s see how things are shaping up for this announcement.  

Factors to Consider This Quarter

During the first quarter, most of the times, crude traded below $40 per barrel. Most importantly, the West Texas Intermediate (WTI) crude fell to the 12-year low mark in mid February. The low levels are owing to plentiful supplies and lackluster demand. Predictably, Chevron’s upstream division has extracted less value for its products. This is expected to put pressure on the company’s first-quarter profit margins, as it is the most oil-weighted among its peers.   

However, one positive development should be kept in mind. Last month, in a milestone move, Chevron commenced the production of liquefied natural gas (LNG) and condensate from the massive Gorgon project located offshore Western Australia. Gorgon LNG – in which Chevron has a 47.3% ownership – is touted to be the largest resource development in the history of Australia. After that, the company sent the first LNG cargofrom its $54 billion worth Gorgon development, located off the coast of Australia. The cargo was dispatched to a Japanese customer.

Finally, downstream results are likely to be strong as refining margins should get a boost from lower input costs. But will these translate into an earnings beat at Chevron?

Earnings Whispers

Our proven model does not conclusively show that Chevron will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is not the case here as you will see below.   

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -54.55%. This is because the Most Accurate Estimate stands at a loss of 17 cents while the Zacks Consensus Estimate is pegged narrower at a loss of 11 cents.

Zacks Rank: Chevron has a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies from the energy space that, according to our model, have the right combination of elements to post an earnings beat this quarter:

McDermott International Inc. MDR with an Earnings ESP of +100.00% and a Zacks Rank #2.

Contango Oil & Gas Company MCF with an Earnings ESP of +40.63% and a Zacks Rank #2.  

Seadrill Partners LLC SDLP has an Earnings ESP of +3.03% and a Zacks Rank #2.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
CHEVRON CORP (CVX): Free Stock Analysis Report
SEADRILL PTNRS (SDLP): Free Stock Analysis Report
CONTANGO OIL&GS (MCF): Free Stock Analysis Report
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