With crude prices hovering below $50 per barrel, the third quarter of fiscal 2016 (3QFY16) remained majorly nonvolatile. With contrast to the second quarter, the refining cracks averaged flat leading to integrated marketing margins realizing a modest seasonal uptick. The only notable exclusion in 3Q was the US natural gas prices that were up $0.70/MMBtu. However, the average does not show the shift in the underlying momentum. Since August, total petroleum stockpile declined to 764 Mb/d in contrast to the normal stock level of 207 Mb/d, while the US crude stockpiles plunged 747 Mb/d from the seasonal inventory level of 67 Mb/d.
Meanwhile, much to the energy market’s surprise, Saudi Arab- the de-facto leader of OPEC has agreed to an output cut. Not neglecting the key player’s significant announcement, research firm Barclays has reiterated its positive view on the big oil, with Suncor Energy Inc. (USA) (SU) being the favorite.
The sell-side firm estimates Exxon Corporation (XOM), Chevron Corporation (CVX), Hess Corp. (HES), Husky Energy Inc. (HSE), and Murphy Oil Corporation (MUR) to post positive earnings for 3QFY16. Other major energy giants are also expected to be in line with the consensus opinion or at most slightly under analysts’ expectations. Barclays opines that the big oil is presently reflecting long-term oil price deck of nearly $65-70 per barrel of Brent crude or approximately $60-65 per barrel of West Texas Intermediate.
Having stated their outlook for the integrated oil and gas companies, the firm expects the refiners to majorly miss consensus estimates for 3QFY16. However, at the same time, Barclays expects earnings to recover in the next few years along with 2016 to mark near-term low point for US refining margins. With Tesoro Corporation (TSO) being its favorite, the large capital refiners are expected to post strong results over the next 12-18 months.
Western Refining, Inc. (WNR) has been downgraded to Equal Weight with a revised price target of $30/share ($29 prior), while PBF Energy Inc (PBF) has been downgraded to Under Weight with a revised price target of $19/share ($26 prior) by Barclays. For 3QFY16, the research firm has increased earnings per share (EPS) of refiners by a 26% median, and reduced EPS of the majors by 7% median.
Furthermore, the largest potential 3QFY16 earnings upside in the research firm’s view is Suncor and Imperial Oil Limited (USA) (IMO), while the biggest potential earnings downside surprise in the sell side firm’s view includes PBF Energy.
For the quarter, Brent crude averaged $46.1 per barrel versus Barclays estimate of $48 per barrel, while the WTI averaged $45 per barrel versus the research firm’s estimate of $47.5 per barrel. For 2017, the firm maintains its Brent crude estimate of $70 per barrel but adjusts its estimate of WTI from $69 per barrel to $68.3 per barrel. In 3QFY16, the US natural gas averaged $2.84/MMBtu versus the firm’s estimate of $2.7/MMBtu. Barclay’s has up ticked its natural gas estimate to $3.05/MMBtu up from $2.84/MMBtu.
Barclays has reiterated its positive rating for both the American integrated energy companies as well as the U.S independent refiners.