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Oil majors' Q3 earnings could prove tepid due to weaker crude prices, output

Many of the top integrated oil and gas majors could see a lackluster third-quarter earnings season in light of weak energy commodity prices over the three-month period, prompting analysts to lower earnings outlooks for some of the largest companies.

"Upcoming results will likely be disappointing in that Brent oil prices were $62 [per barrel] during 3Q," Evercore ISI analyst Doug Terreson wrote in an Oct. 10 note to clients. Terreson said he has lowered his earnings estimates for "Big Oils" by 20% for the quarter.

"3Q19 could be a messy reporting period. Downstream conditions improved sequentially but not as much as we expected. Crude prices were in line with our forecast, but global natural gas prices remained at depressed levels. Our earnings estimates are currently 14% below the consensus," Jefferies analyst Jason Gammel said in an Oct. 17 note to clients.

Supermajor Exxon Mobil Corp., which saw chemical and downstream earnings battered in the second quarter, already cautioned that its third-quarter earnings could take a hit from the weaker oil prices and the absence of a previous tax benefit. In an Oct. 1 Form 8-K, Exxon said third-quarter profits could run 50% lower on the year at about $3.1 billion. Exxon's upstream earnings could sink about $800 million to $2.4 billion, down almost 45% from the $4.23 billion reported a year earlier.

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Analysts expect Exxon to report normalized EPS of 72 cents for the quarter, according to S&P Global Market Intelligence estimates as of Oct. 15, beating the prior quarter's EPS of 61 cents but down sharply from $1.46 per share in the third quarter of 2018. Exxon will report results Nov. 1.

As Exxon works to sell off $15 billion in assets by 2021, the major also intends to hike spending in the next few years. Unlike most peers who are trying to maintain a disciplined spending approach, Exxon has earmarked $30 billion this year and $33 billion to $35 billion in 2020, as it focuses on an aggressive plan to increase Permian basin output to 1 million barrels of oil equivalent per day in the next five years.

The market is likely to zero in on this key metric — Exxon's Permian production — in the third quarter, Raymond James analyst Muhammed Ghulam said in an Oct. 16 email. In the second quarter, Exxon's Permian production was 274,000 boe/d, surging nearly 90% on the year. Market Intelligence estimates peg Exxon's total third-quarter output at 3.91 million boe/d, little changed from levels in the second quarter.

London-based BP PLC also said its third-quarter financials could be affected by lower output due to turnarounds and shut-ins from Hurricane Barry as well as after-tax charges related to asset sales in Alaska and the Lower 48. BP said Oct. 11 that it could take a hit of $2 billion to $3 billion in the quarter because of these divestments.

The divestiture-related charge is expected to increase BP's gearing in the short term, which should remain above the top end of the 20% to 30% range through the end of this year, BP said. BP's indebtedness reached 31% at the end of the second quarter, a sticking point for analysts despite overall positive metrics for that period, reflecting in part the company's $10.5 billion purchase of U.S. shale assets from BHP Group.

BP sold most of its Permian Basin assets in 2010 to help defray the costs of damages related to the Deepwater Horizon oil spill but moved back into the shale game in 2018 by scooping up the BHP assets.

"BP investors will be looking for the latest updates on how activity is progressing within the U.S. shale acreage it acquired last year. In addition, after the recent divestitures in Alaska and Egypt, they will also be interested in learning which other assets are also under consideration for divestment," Ghulam said.

BP also disclosed Oct. 11 that it will reach its $10 billion divestment target by the end of this year instead of 2020. BP CEO Bob Dudley, who will retire in March 2020, said the company could sell some of its more carbon-intensive assets as part of the plan, which would help the company reduce its carbon emissions to align its business model with the Paris Agreement on climate change.

Market Intelligence estimates for BP's third-quarter EPS stood at 11 cents as of Oct. 15, down from 14 cents in the prior quarter.

"Lower oil and gas prices, based on BP commodity price rules of thumb, are expected to decrease earnings by $650m [quarter on quarter]," Gammel said.

BP will report third-quarter financial results Oct. 29.