Why Focusing on Quarterly Earnings Results Will Lead You Astray

Why Focusing on Quarterly Earnings Results Will Lead You Astray

Posted On August 29, 2023 11:18 am

Investors often use quarterly earnings results to decide whether to buy or sell individual stocks; however, investors who focus on past results will likely miss out on the blow-out positive quarters when looking at upstream energy producers.

Here’s what to look for instead, and what to look for…

Upstream energy companies are oil and gas producers. These companies drill wells to generate revenue from selling the oil and natural gas they produce. The variable nature of energy prices means that profits will swing up and down with changes in energy commodity prices.

The cost of producing a barrel of oil remains relatively steady. And natural gas, often an associated byproduct, provides extra revenue with little additional expense. The chart below shows the price of oil for the last year, which steadily declined from a year ago until the start of the 2023 third quarter. As a result, quarterly earnings in the upstream sector have also dropped.

Note that it was right at the end of the second quarter that oil bottomed in the $60s; it has since climbed into the low $80s. Upstream producers have been taking drill rigs out of service, leading to lowered production and likely continuing the price appreciation.

When the upstream energy companies report their third quarter in late October, I expect most will post positive earnings surprises. Several companies in this group pay variable dividends, and the higher profits will result in significant dividend boosts compared to the second quarter payouts.

Here is a list of the major U.S.-based upstream producers, market caps, second-quarter production levels, and dividend policies…

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