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Raymond James equity research analyst Pavel Molchanov on how falling oil prices will impact earnings
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With oil prices grade -- -- tumbling again today after being down more than 17%.
Last quarter look at that.
As oil majors get set to report how bad will it hurt earnings the bell molchanov covers the sector for Raymond James thank you so much for joining us.
So this is I -- -- is bad news for the majors it's gotta be good for refiners though because certainly the price of oil is falling faster than the price of gasoline.
Who who's -- -- was about four.
Yeah I do -- -- story for integrated oil companies big gap -- majority of their earnings from upstream cell production of oil and gas.
And the reality is the prices are down from not Q1 levels or from.
I -- adult levels sound.
What -- we looked at WTI crude or Brent crude and of course the price natural gas is down not even more so from the year ago on a percentage basis.
Lake is set for refiners are particularly US refiners to very different ball game for damn what -- loyalists fifty bucks or -- hundred box does not.
Matter -- -- -- -- -- -- margin for them.
Yeah let's talk about the margins Yasser -- season is coming up -- big integrated oil companies that you think are gonna disappoint let's start with that.
Well EE -- it's hard to say who's gonna disappoint because earnings are always a black box a lot of international operations.
What I will say is that a year over year decline in earnings.
Will be that's smallest for companies that have a large.
Refining business and chemical business -- signed.
He's a great example Exxon if it were standalone.
Fox Business the chemicals segment would be the largest chemical company in the United States.
And this year it's gonna account for about 16.
All of Exxon's total earnings that is a growth rate natural hedge.
In a time of declining oil and gas prices because chemicals used oil and gas as an input not an output.
Sure it in the short term you might focus on the refiners is there anyone there you like or you know have people already -- -- -- coming gotten in on it's too late.
Well it's not too late -- certainly a lot of the easy money -- refining has been made -- is pretty much the only.
Subset -- energy stocks that is actually up up you on a year to date basis.
-- gotten you diversified refiners like Valero.
Are up relatively moderately year to beat in hot spot like holly frontier for example which is up 50% unity date.
It obviously -- more focused on not on the mid continent more leverage to WTI.
-- -- you got a lot of Bob lot of earnings tail winds that that's for sure.
You're you're bearish on the sector in general the same time though you do have an outperform bumped up to an outperform.
On five different companies Anadarko Apache BP Chevron.
And Exxon why do you think that there are gonna do well in the whole sector is sort of in a bad position.
-- of.
You is that the price of oil is -- continue falling and will bottom in the second quarter of 2013.
At about 65 -- it's WTI.
Op being a higher than that for -- could look that's that's that's a hefty decline that's about right when he percent below.
40% below current levels and in that context we gotta stay defensive so companies that have strong balance sheets.
That are generating free cash flow that are being solid dividends and the companies you just mentioned all fall into -- Actually -- your position in any of those five companies right now are you saying -- you have to be in this sector you know this is the safest place to meet you gotta be there.
Each you have to be either the energy complex.
Stick with the more defense saying what if you don't know my always known -- -- centric names.
But if you -- when that's your position willingly here.
I selectively.
But look god the reality is if if -- down 20% the next twelve months as we think.
-- a lot of these stocks will be pressured that are there's no way of getting around it -- there's no way are right about thanks for coming out we appreciate your insight.
