As the third-quarter earnings season approaches, I’m curious how the different energy sectors will report. I expect very good earnings, but also think upstream and downstream could have quite different results, and more importantly, different share price reactions.
Upstream energy companies drill for crude oil and natural gas. Their results depend on production levels and oil and gas commodity prices.
Meanwhile, downstream energy companies are the refiners who take in crude oil and produce fuels and other petroleum products. Refining profits come from the crack spread, which is the difference between the price of a barrel of oil and the wholesale prices of the fuels produced from that barrel. The 3-2-1 crack spread is a metric that takes three barrels of oil and cracks them into two barrels of gasoline and one barrel of diesel fuel.
Here is RBN Energy’s year-to-date crack spread.
You can see why I expect refining stock profits for the third quarter to be excellent.
The story is a little different for upstream producers and crude oil prices. The United States Oil Fund (USO) tracks the price of crude oil. Here is the three-month chart.
Oil was lower early in the quarter, then had a big run-up to more than $100 per barrel, then started down in mid-September. WTI crude is now trading at $88 per barrel. Upstream companies had a good third quarter, but will they blow the doors off earnings or disappoint investors?
I wanted to find an ETF that tracks upstream energy stocks. I was disappointed. I looked at the Invesco Energy Exploration & Production ETF (PXE) and the iShares US Oil & Gas Exploration & Production (IEO), but they were more heavily weighted toward downstream refining companies.
I have both upstream and downstream stocks in my recommended portfolios and watch lists. Earnings season will be very interesting and will hopefully show where the energy sector profits are.
"I updated my spreadsheet and it seems illegal."
Financial advisors say you need $1.5M to generate $5,000/month. A revolutionary new investment does it with potentially $150,000... even less in some cases. Kelly G: "I updated my spreadsheet and it seems illegal. The income keeps growing." Transform non-dividend stocks like Apple and Tesla into monthly income machines. Bloomberg reports they're "entering a golden era." Simple as buying a stock. Watch the presentation that shows you all of the steps, click here.
