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Earnings ESP

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A disruptive home front rescued temporarily by the federal debt limit raise has seen mixed reactions. The debt respite comes at a time when rising interest rates, to pull up the greenback, is taking its toll on GDP growth. However, with the U.S. Senate raising the Treasury Department's borrowing authority, a flight towards U.S. government bonds and bond proxies would now be more pronounced.
 
In the country’s oil market, this flurry of bonds has sparked concerns about the future direction of crude price movement and poses threat to investor sentiment. Already, a sharp drop in refinery utilization rates due to seasonal maintenance and higher production have resulted in a massive stockpile of crude in the U.S., and a consequent price decline.
 
Above average crude oil inventory builds will increase the likelihood of a correction in commodity prices, and we believe a greater movement in share prices. This is due to the fact that investor sentiment for most oil plays is determined by earnings and valuation multiples. As such, investors should bet on asset backed oil plays or exploration and production (E&P) companies that the market is yet to fully price in since forward multiples are lower than prior upcycles.
 
Pick the Winners Among the Crowd?
 
Picking the best stocks from the E&P space for one’s portfolio is a fairly simple task. One way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Zacks Earnings ESP.
 
Earnings ESP is our proprietary methodology for identifying stocks that have the best chance to surprise with their next earnings announcement.   
 
For investors seeking to apply this strategy to their portfolio, we have highlighted 3 E&P stocks that may stand out this earnings season:
 
Clayton Williams Energy, Inc. (CWEI - Snapshot Report)
 
Midland, Texas-headquartered Clayton Williams Energy is engaged in the exploration for and production of oil and natural gas primarily in Texas, Louisiana, and New Mexico. As of the end of 2012, the company had 75.4 million barrels of oil equivalents (MMBOE) of proved reserves, which were 77% oil and 58% proved developed. It also added proved reserves of 20.5 MMBOE in 2012, resulting in a reserve replacement of 365%. 
 
The company is anticipating stable quarterly earnings, which is expected to be up 4.92% year over year with the Zacks Consensus Estimate pegged at 64 cents. Analysts have been steadily moving their quarterly and full year estimates higher, suggesting an earnings momentum in the quarters to come. The momentum has carried over into the bourses as well and shares are currently up over 76% from the start of the year. This will remain a stock to watch out for the rest of this year.
 
CWEI currently has a Zacks Rank #2 along with an Earnings ESP of +25.71%. The firm is scheduled to report earnings on Oct 24.
 
Whiting Petroleum Corp. (WLL - Snapshot Report)
 
Whiting Petroleum Corporation acquires, exploits, develops and explores for crude oil, natural gas and natural gas liquids primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the U.S.
 
The company has a long-term earnings expectation of 11.9%. Although there is some concerns over growth rates, estimates have largely been moving higher, especially for the upcoming quarter. The firm has a solid track record of earnings outperformance, and the most recent estimate suggests that we could see another beat this quarter from this Delaware corporation.
 
Whiting Petroleum currently has Zacks Rank #1 along with an earnings ESP +7.00%. The company is slated to report its third-quarter 2013 results on Oct 23.
 
Energen Corp. (EGN - Snapshot Report)
 
Birmingham, Alabama-based Energen is an independent oil and gas exploration and production firm. Through its wholly owned subsidiary, Energen Resources Corp., the company had approximately 750 million barrels of oil-equivalent proved, probable, and possible reserves at year-end 2012. These all-domestic reserves are located mainly in the Permian and San Juan basins. The company also involved in acquisition and development of oil and gas properties in the U.S.
 
The firm is currently expecting superb earnings momentum with third quarter earnings growth above 40%. Analysts have also been gradually moving their estimates higher for the firm, suggesting sweeter surprises ahead.
 
Energen has a Zacks Rank #2 and a +6.56% earnings ESP. The firm is scheduled to report earnings on Oct 30.
 
Bottom Line
 
The economics of oil and gas supply and demand is the fundamental driver of the E&P industry. Previous strength in commodity prices has enabled E&P stocks to produce good returns to date in 2013. This is reflected in the SIG Oil Exploration & Production Index which traded up 33.7% year-to-date. As such, material share price rises will be rare going forward barring some outperformers backed by a solid Zacks Rank and a positive Zacks Earnings ESP. Investors looking to veer off from the political mayhem this earnings season should be on the look for these.

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