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Shale Stocks Are Suffering From A Sentiment Problem

Tsvetana Paraskova

Third-quarter earnings in the oil and gas industry have begun to trickle in at a time when investors have the lowest confidence and interest in U.S. shale stocks in years.

After years of frustration with the lack of meaningful returns from shale firms and amid persistently low oil and gas prices, investors have turned their backs on energy stocks. Banks have too, restricting lending to shale firms who have grown production so far, mostly by taking on more debt.

U.S. shale drillers are not optimistic about the near future, either, admitting that Wall Street has turned off the tap on funding and that low oil and gas prices will continue to depress margins and earnings.

Analysts expect the Q3 earnings of large and small shale companies to be much lower than the profits they booked in Q3 2018, when oil prices were on the rise, just before concerns about global oversupply sent them plunging by around 40 percent in Q4 2018.

The energy sector in S&P 500 is reporting the biggest annual decline—39.3 percent—in earnings of all eleven major sectors in the index, John Butters, Senior Earnings Analyst at FactSet, said in an Earnings Insight note last week. In terms of revenues, the energy sector in S&P 500 is reporting the second-largest yearly decline in revenues of all eleven sectors, 8.7 percent.

Oil prices in Q3 were on average 19 percent lower than the price of oil in the same quarter last year, dragging down the earnings and revenues for the sector, FactSet’s Butters wrote.

Related: IEA: An Oil Glut Is Looming

In Q3 2019, four of the six subsectors in energy are reporting or expected to report lower earnings compared to Q3 2018, with the Oil & Gas Exploration & Production and Integrated Oil & Gas subsectors hit by a 51-percent slump in earnings each. Oil & Gas Exploration & Production and Integrated Oil & Gas will also lead the declines in revenues, with an expectation for a 17 percent drop each, according to FactSet.

Many of the large shale companies reporting Q3 financials in the coming days are expected to post much lower earnings than they did in the same quarter last year.

For example, Continental Resources, reporting on October 30, is forecast to see its earnings per share (EPS) at US$0.45, halved from the US$0.90 EPS a year ago, when it beat analyst estimates, according to the analyst consensus in The Wall Street Journal.

EOG Resources easily beat earnings estimates for this time last year, posting EPS of US$1.75, but this year in Q3, the consensus estimate points to EPS of US$1.13. EOG Resources reports earnings on November 7.

The outlook for smaller shale firms is even gloomier.

And oil and gas industry executives admit that tough comes are here for U.S. shale.

According to the Dallas Fed Energy Survey for the third quarter of 2019, despite the 12th consecutive quarter in which oil and gas production increased, activity in the sector contracted amid heightened uncertainty for the future. Comments from executives in the survey highlighted the gloomy mood in the U.S. shale patch.

“We expect industrywide drilling-and-completion capex [capital expenditures] spending to be down by about 10 percent in 2020,” one executive at an exploration and production firm said.

Another wrote that “the overall industry conditions are not good. Prices are too soft and erratic, and costs are too high. My outlook for the business is pessimistic right now.”

Related: Russia Predicts The Death Of U.S. Shale

Executives at E&P firms cite companies outspending their cash flows, restricted access to funding, and growing bankruptcies that suggest reduced activity and flat to lower production.

“The capital market has dried up for small E&P companies,” one executive said, while another noted:

“Further cost declines will not be forthcoming. It seems no one has any money for oil and gas projects. Lack of Wall Street participation in oil is very apparent.”

With investors bailing on the energy sector and the stubbornly low crude oil prices, it’s no surprise that this earnings season could turn out to be one to forget.

By Tsvetana Paraskova for Oilprice.com

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