Energy companies are expected to bounce back from a recent slump in earnings, thanks to the surge in oil and refined-product prices. Improved cash flows will also drive buybacks, leading to a potential surge in shares. Ahead of reporting season, here are the key factors to watch:
Higher Oil Prices & Refining Margins
According to a research note from Bank of America, major European energy companies are projected to see a 45% increase in net income compared to the previous quarter. This boost can be attributed to higher oil prices and refining margins during the quarter. Brent crude oil broke the $96 per barrel mark in September, reaching a milestone not seen since 2023. The cuts made by The Organization of the Petroleum Exporting Countries (OPEC) and ongoing geopolitical uncertainty in the Middle East have helped keep prices elevated.
Refining margins have particularly shined this quarter, with names exposed to refining experiencing positive momentum, as highlighted by RBC Capital Markets. Pre-released trading updates from oil majors reveal that they beat consensus forecasts on third quarter refining margins by an average of 14%. This corresponds to a significant quarter-on-quarter increase of around 100% in refining margins. Among the players, Repsol from Spain stands out as the most refining-focused company.
Overall, energy companies are looking poised for a rebound, boosted by higher oil prices, refining margins, and improved cash flows. Investors should keep an eye on these factors as the reporting season unfolds.
European Energy Majors Set to Return Capital to Shareholders
European energy majors are expected to return significant amounts of capital to shareholders this year, according to analysts at Berenberg. France's TotalEnergies has already set the bar with its intention to distribute over 40% of its earnings to shareholders in the medium term, which is expected to motivate other companies in the sector to follow suit, says RBC. The recent departure of BP's chief executive may also prompt the company, along with Shell, to increase their buyback programs.
Cash Flow Prospects
The second quarter of this year saw European oil-and-gas majors collectively experience the lowest free cash-flow figure since 2020. However, RBC forecasts a 27% rise in cash flow from operations across the sector in the third quarter, driven by improved oil prices and refining margins. While Shell may report a working capital hit in Q3, it is still expected to have the ability to increase its buyback program, states Berenberg. TotalEnergies is predicted to report a strong cash flow, thanks to divestments that support a higher buyback program, according to the German lender. On the other hand, BofA expects working capital outflows to have a negative impact on cash conversion and limit the upside to cash flow from operations consensus.
Analyst Picks and Reporting Dates
BofA and Berenberg identify Shell and TotalEnergies as top picks among European energy majors, with Berenberg also highlighting Italy's Eni. The reporting dates for TotalEnergies and Repsol are set for October 26th.
Upcoming Energy Company Earnings Releases
Eni: Oct. 27
Equinor: Oct. 27
GalpEnergia: Oct. 30
BP: Oct. 31
OMV: Oct. 31
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