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Earnings ESP

2 Energy Stocks Drilling for Earnings Beats
 
The prospects of the oil industry in general, and the oil and gas drilling sector in particular, are largely tied to the related commodities. The oil/natural gas-focused stocks thus stand to benefit from the recent momentum in crude oil and natural gas prices as well as an increase in active rigs. 
 
Crude’s recent run has been spurred by a spate of upbeat reports, providing further evidence that the U.S. economy is coming out of its winter freeze. This has raised hopes for robust fuel and energy demand in the world’s biggest oil consumer. Along with this, the U.S. rig count has slowly been moving northward on the back of perked-up activity in the Permian and Eagle Ford basins.
 
Importantly, with less oil being discovered on land and with companies having to dig ever deeper to get to their reserves, drilling contractors are poised to benefit from a market with robust multi-year demand trends, given their technologically-advanced and versatile drilling fleet.
 
In the first quarter, while major players in the drilling space like Transocean Ltd. (RIG), Diamond Offshore Drilling, Inc. (DO) and Ensco plc (ESV) witnessed a distinct fall in utilization of ultra deepwater rigs, these also enjoyed rising dayrates.
 
Most of the drillers have already reported and we are about to close the curtain on the first quarter. For those investors who have missed out on opportunities offered by the sector so far this earnings season, here are some lucrative options that are still available.
 
Picking the Right Stocks
 
With a wide array of companies in the sector muddling up the stock picking power, the Zacks methodology offers some relief. One could narrow down the list using the positive Zacks Earnings ESP as a guide, along with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). 
 
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. 
 
Here are two drilling stocks that are poised to beat estimates according to our methodology:
 
New Source Energy Partners L.P. (NSLP - Snapshot Report) has an earnings ESP of +24.32% and a Zacks Rank #2. The Zacks Consensus Estimate is pegged at 37 cents. Over the past one year, the defensive stock with a beta of 0.4, gained over 12%.
 
New Source Energy Partners is engaged in the acquisition and development of oil and natural gas properties in the United States.
 
The Oklahoma City, OK-based partnership will release its first quarter results on May 14. 
 
Ocean Rig UDW Inc. (ORIG - Snapshot Report) had a superb 2013 having surpassed the Zacks Consensus Estimate in all the four quarters. For the upcoming release, Ocean Rig has an earnings ESP of +50.00% and a Zacks Rank #3. 
 
The international offshore drilling contractor initiated a quarterly cash dividend in May itself that currently yields a respectable 4.5%. The driller which operates solely international offshore drilling contractor presents an interesting choice for investors as it focuses on areas where production is expected to skyrocket going forward.
 
The Nicosia, Cyprus-based company will release its first quarter results on May 28. 
 
Bottom Line
 
The volatile nature of the underlying commodities notwithstanding, the oil and gas drilling space is enjoying slow-but-steady growth on ever-increasing energy demand. Moreover, the risks latent in ultra deep water investing are unlikely to persist, indicating that investor aversion from the space will only be a short-term phenomenon. According to the Bureau of Ocean Energy Management (BOEM), the deep water space oil production is predicted to grow 12% annually till 2030. The agency also expects the majority of action in the deep water space 2015 onward.
 

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