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Oil and gas companies have had two years of skyrocketing growth, but this earnings season could mark the beginning of their descent back down to earth.
Wall Street analysts say that Big Oil has passed its peak, but the ride down will be slow — these companies will still bring in remarkably large profits for a while.
What’s happening: The story of 2022 (and 2021 to a lesser extent) was energy. Brutally high oil and gas prices were the talk of the town and one of the largest contributing factors to sky-high inflation. That was bad news for drivers, but ended up being great for the energy industry as oil prices and energy stocks are closely interlinked.
As markets fell under the pressures of economic uncertainty, geopolitical chaos, elevated inflation and a hawkish Fed, the energy sector thrived. The S&P ended 2022 down nearly 20%, while the energy sector grew by about 60%. No other sector gained even 5% last year.
But analysts say US oil companies can’t keep winning for much longer.
“Although 2023 should remain a solid year for the integrated oils, there is less headroom than we envisaged just a couple of months ago given the correction in oil prices and halving in European gas prices,” wrote HSBC Global Research analysts in a note.
Bank of America estimates that fourth-quarter earnings for oil and gas producers will be down 11% from third-quarter levels.
“In our view, upcoming earnings for the US oils will be one of the most consequential in several years,” wrote Doug Leggate, a Bank of America research analyst, in a recent note. “It is now clear that the best quarter for many US oils has passed.”
Big names have already reported misses. Chevron (CVX) reported $7.9 billion in fourth-quarter profit on Friday. That was lower than its profit in the third quarter and below Wall Street expectations, even though the company booked a record $36.5 billion in annual earnings.
Big profits for investors: Oil shareholders are still sleeping well at night. Exxon Mobil (XOM), Chevron, BP (BP), Shell (RDSA) and TotalEnergies are expected to report a combined mega-profit of $190 billion for 2022, according to estimates from Refinitiv.
They’re also widely expected to use these mega-profits to reward their shareholders with dividends and buybacks. Chevron announced last week that it plans to buy $75 billion worth of its own shares, and hike its quarterly dividend.
Those buybacks may keep stock prices elevated for a while. “We think that buyback spending is probably the safety valve on uses of cash if fundamentals begin to deteriorate,” wrote Stewart Glickman, deputy research director at CFRA in a recent note.
What’s next: One key risk to the energy sector is the possibility of a steep recession which could cause “oil demand to careen into a ditch,” wrote Glickman. “We have seen prior instances of demand falling through the floor and taking prices with it (see 2009, and again in 2020), so it is not out of the realm of possibility,” he said.
Exxon reports today, Shell reports Thursday and BP and TotalEnergies report the following week. Analysts expect misses and some negative forward guidance.
From worst to first: 2022’s losers are leading the market this year
Oh how the tides have turned on Wall Street.
The communications sector, with its many hard-hit tech and media companies, was the worst-performing market group last year, plummeting a whopping 40% in 2022. But time changes everything. It’s currently the best performing sector so far in 2023 and has surged nearly 10%, according to data from S&P Global Market Intelligence.
CNN owner Warner Bros. Discovery, which plunged nearly 60% last year, has surged more than 50% so far in 2023 and is the best performer in the S&P 500, reports my colleague Paul R. La Monica.
Several other media companies, old and new, have also enjoyed a resurgence this month. CBS owner Paramount has soared 35%. Disney (DIS) is up about 25%. Netflix (NFLX) has gained more than 20%. (So much for the death of streaming media.) Shares of Facebook and Instagram owner Meta Platforms are up more than 20%, as well.
Consumer discretionary stocks, which include many retailers and auto companies, have also enjoyed a stunning rebound after tumbling last year. The sector was the second-worst performer in 2022 with a loss of about 38%.
Investors seem to be buying into hopes the Fed will continue pulling back on the size of its rate hikes and possibly even pause later this year. Increasingly, the sentiment is that the economy could wind up heading for a so-called soft landing: a slowdown but not a full-blown recession.
Those hopes have boosted other consumer stocks. Amazon (AMZN) is up about 20% this year. Cruise line owners Carnival, Royal Caribbea (RCL)n and Norwegian (NCLH) are among the top performers in the S&P 500. So are shares of casino companies Caesars (CZR), Wynn, Las Vegas Sands (LVS) and MGM (MGM).
TikTok CEO to testify before Congress in March
TikTok CEO Shou Zi Chew will testify at an upcoming hearing before the House Energy and Commerce Committee, a committee spokesperson confirmed to CNN Monday.
Chew will be the sole witness at the hearing, scheduled for March 23. He is expected to testify on TikTok’s privacy and data security practices, its impact on young users, and its “relationship to the Chinese Communist Party,” reports my colleague Brian Fung.
The high-profile hearing underscores the rising political risk for TikTok as its negotiations with the US government on a national security deal continue to drag on.
US officials have raised concerns that China could use its laws to pressure TikTok or its parent, ByteDance, to hand over US user data that could be used for intelligence or disinformation purposes. Those concerns have prompted the US government to ban TikTok from official devices, and more than half of US states have taken similar measures, according to a CNN analysis.