Energy company earnings are among the most anticipated fourth quarter results, as investors watch for the impact of falling oil prices on profits.
Wall Street is expecting the results to be ugly — earnings growth expectations for the energy sector declined the most in the S&P 500, at -19.1% Monday compared to 8.1% on September 30, according to FactSet.
However, Morgan Stanley’s Ole Slorer says that the drop in energy prices won’t really impact the sector’s fourth quarter earnings.
“Meaningful oil price declines have historically impacted quarterly results on a 2 to 3 quarter lag, and we see the brunt of the impact in 2Q/3Q15,” Slorer wrote in a note Monday.
To conclude this, Slorer ran a regression to estimate the relationship between Brent crude prices and quarterly EPS, showing a lag of at least two quarters for non-backlog oil services companies. He also found that when Brent collapsed in 1998, the EPS of Schlumberger Ltd. and Halliburton, two of the largest oil fields services companies, lagged by about two quarters.
“Since the largest crude price drops occurred in 4Q14 (-25%) and 1Q15 (-35% if Brent remains at $US50), we expect the main impact on earnings to take place in 2Q/3Q15,” Slorer wrote.
This chart shows how the fall in Brent prices precedes projected slump in EPS for Schlumberger Ltd. and Halliburton.
The price of West Texas Intermediate oil slumped below $US45 for the first time since 2009 on Tuesday. Brent crude, the international benchmark for prices, fell below $US50 per barrel for the first time in six years Monday.
Schlumberger Ltd. on Thursday will be the first oil-field services companies to report earnings.