By Christian Moess Laursen
European integrated energy companies are expected to post lower earnings in the fourth quarter than in the preceding quarter, mainly due to lower oil prices and refining margins. Therefore, the degree of resilience in shareholder returns will determine which company will outperform peers, analysts say.
Shares of companies in the sector have underperformed the broader market in the quarter. Neste and Eni are trading somewhat higher than at the end of September, while shares from other companies fell during the period.
Here’s what you need to know:
WHAT TO WATCH:
— A combination of lower oil prices and refining margins are expected to have hit fourth-quarter earnings, compared with the preceding three months. Bank of America analysts expect an aggregate 8% decline in net income quarter-on-quarter, “a direct result of mainly lower refining margins across the quarter,” they wrote in a research note. Since peaking in August 2023, refining margins have plummeted at least 65%, BofA said. In addition, weaker European gas prices and continued challenges in chemicals are likely to weigh further on earnings, RBC Capital Markets analysts said in a research note. “This leaves us cautious on Equinor, as well as TotalEnergies, which remains a well-favored name among investors,” the Canadian bank said. Elsewhere, Barclays analysts forecasted in a research note that sector earnings are set to fall 8% sequentially, driven by lower oil prices, lower refining margins and seasonally higher costs, only partly offset by an increase in natural gas prices.
— Returns to shareholders should still be strong, although the less favorable macro environment could have exerted some pressure on the levels of buybacks, Berenberg analysts wrote in a research note. As such, some of the companies might have to lean on balance sheet to support buybacks, “and so commentary around intentions for distributions will be keenly watched,” RBC said. Indeed, the degree of resilience in shareholder returns will likely determine which company will outperform its peers, BofA analysts said. “We reiterate share price reaction will primarily be driven by surprises in updated 2024 cash return outlooks,” they said. The U.S. bank’s top picks to outshine peers in terms of shareholder returns are Shell and TotalEnergies, while Repsol, OMV and Galp have less capacity to surprise, it said. Those three plus Equinor “will likely eat into their balance sheets to fund shareholder distributions,” BofA said. Given BP has had two weak quarters in a row, investors will keep a sharp eye on its shareholder distributions, Barclays analysts said.
— While oil trading results are likely to be muted across the board, gas trading is where we could see significant differences, RBC said. Shell flagged in its update earlier this months that gains from integrated gas are expected to be significantly higher on quarter. Elsewhere, output from TotalEnergies and BP should also come out strong in the fourth quarter, RBC said. Natural gas prices were higher in the October-December period compared with the third quarter, although down on year, partly due to higher inventory levels and relatively mild temperatures, Barclays said.
SCHEDULE:
– Shell: Feb. 1
– OMV: Feb. 1
– BP: Feb. 6
– TotalEnergies: Feb. 7
– Equinor: Feb. 7
– Neste: Feb. 8
– Galp: Feb. 12
– Eni: Feb. 16
– Repsol: Feb. 22
Write to Christian Moess Laursen at [email protected]
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