Will Falling Oil Prices Pull Down Chevron (CVX) Q3 Earnings?

Zacks

U.S. energy giant Chevron Corp. (CVX) is set to release its third-quarter 2014 results before the opening bell on Friday, Oct 31.

In the preceding three-month period, Chevron delivered a positive 11.19% earnings surprise – the first outperformance in the last 4 quarters – buoyed by higher oil prices. Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Being the most oil-weighted among peers, the commodity’s price tumble over the last three months is expected to drag down earnings for the second-largest U.S. oil company by market value after Exxon Mobil Corp. (XOM).

On top of this, the narrowing of the so-called ‘Brent-WTI spread’ is likely to translate into less profit for its refining division.

As it is, due to its integrated nature, Chevron is particularly susceptible to downside risk from the current weakness in the Chinese and the European economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.

Earnings Whispers?

Our proven model does not conclusively show that Chevron is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.

Negative Zacks ESP: This is because the Most Accurate estimate stands at $2.54, while the Zacks Consensus is higher at $2.60. This results in an ESP of -2.31%.

Zacks Rank #3 (Hold): Chevron carries a Zacks Rank #3 (Hold), which when combined with a negative ESP makes surprise prediction difficult.

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

Stocks to Consider

While earnings beat looks uncertain for Chevron, here are two energy firms you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

Murphy USA Inc. (MUSA) has an Earnings ESP of +20.51% and holds a Zacks Rank #1 (Strong Buy).

Cobalt International Energy Inc. (CIE) has an Earnings ESP of +11.11% and holds a Zacks Rank #1.

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