Better Trends for Energy E&P Companies

We might be moving closer to a turnaround for oil & gas exploration and production (E&P) companies. During the past 2 weeks, the number of positive revisions to full-year earnings estimates for the group has doubled, rising from 125 to 250.

This shift has caused the revisions ratio to turn positive, meaning that there are more positive than negative estimate revisions, a bullish sign.

More impressively, the upward revisions factor in more than just better-than-feared first-quarter earnings. Brokerage analysts are also expecting profits throughout the rest of the year will be above previous forecasts.

The trend is apparent with several E&P companies within the group, though 4 particularly stand out:

• Apache Corporation (APA) beat first-quarter estimates by 26 cents with earnings of 65 cents per share. In response, the full-year consensus earnings estimate was revised 44 cents higher to $3.36 per share.
• Forest Oil Corporation (FST) reported first-quarter profits of 29 cents per share, 12 cents above expectations. The average forecast now calls for full-year earnings of $1.33 per share, a 44-cent increase from a month ago.
• Newfield Exploration Company (NFX) earned 85 cents per share, 15 cents above expectations. The 67-cent increase in the full-year consensus earnings estimate sent the average forecast to $3.86 - its highest level in more than 3 months at
• Ultra Petroleum Corporation (UPL) beat by 4 cents with first-quarter profits of 26 cents per share. Positive revisions by more than half of the covering analysts sent the full-year forecast 18 cents higher to $1.62 per share.

Higher Production, Lower Costs

All 4 companies increased production last quarter. Though the increases were not enough to offset lower natural gas prices, they did help.

The bigger factor, however, was the attention paid to controlling costs. Several companies throughout the industry group discussed either cutting their capital expenditures (CapEx) budgets or spending only what their cash flows allow them to. (Obviously, the tight credit markets are behind this, though uncertainty about commodity prices is also causing energy CFOs to be cautious.)

Natural Gas Trends

The emphasis on cost controls helped to support operating margins and maximize profitability at a time when natural gas prices have been weak.

The positive revisions in earnings estimates suggest that brokerage analysts believe natural gas prices could be stabilizing. Notice in the above chart of the United National Gas Fund (UNG), an ETF that invests in natural gas futures, that the price has rebounded recently.

Like oil and other commodities, the increase in natural gas prices reflects the recent improvement in the economic data - specifically, the slowing rate of deterioration.

Is Now The Time To Buy E&P Companies?

The Zacks Industry Rank for Oil & Gas-U.S. Exploration & Production is 3.11, the equivalent of a hold rating. Though earnings estimates have improved, there still remains a large number of negative revisions to estimates. (The total number of revisions made over the past 4 weeks is 250 up and 209 down.)

This suggests that though the picture is improving, short-term risks remain. APA, FST, NFX and UPL are all Zacks #3 Rank ("hold") stocks.

Long-term investors should also note that Zacks Equity Research analyst Sheraz Mian has hold ratings on FST and NFX.

More aggressive traders should note that brokerage analysts were behind the curve in adjusting their forecasts during last year's commodity burst. Therefore, there could be an opportunity to trade these stocks before a clear rebound in natural gas prices has started. Such a strategy is not without risks, however, so pay attention to the price action.

More cautious investors may want to wait for a clearer entry point, even if that means giving up some potential short-term gains.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Read the full analyst report on NFX

Read the full analyst report on UPL

Read the full analyst report on APA

Read the full analyst report on FST

Read the full analyst report on UNG