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Earnings ESP

3 Oil & Gas E&Ps for Q2 Earnings Beats

The prospects of the energy industry, the Exploration and Production (E&P) 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 their prices.

During the last few months, crude prices have mostly traded over $100 per barrel range. Most importantly, in June, the West Texas Intermediate (WTI) crude crossed the $106 threshold for the first time since Sep 2013, as tensions over Iraq continued to feed supply concerns in the Middle East. (Read our full coverage on the Iraq turmoil: Crude Rallies on Iraq Conflict: Oil Stocks in Focus)

Meanwhile, natural gas price also showed improvement. After hovering near the $3.5 per million British thermal unit level for most of 2013, natural gas traded over the $4.5 threshold during the entire second quarter. A markedly lower natural gas inventory level – less than the 5-year average underground storage level as per the Energy Information Administration (EIA) – during the last three months aided the price rise. Also, increased natural gas consumption for electricity generation acted as a catalyst.  

The healthy pricing environment will allow the E&P companies to extract more value for their products.  We are now in the initial days of the Q2 earnings season and the sector is most likely to offer good investment opportunities with the upcoming releases.

Picking the Right Stocks

With a wide array of companies in the sector muddling up the stock picking power, the Zacks methodology could offer some relief. One could narrow down the list using positive Zacks Earnings ESP as a guide, along with a favorable 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 three E&P stocks that are poised to beat estimates according to our methodology:

Clayton Williams Energy Inc. (CWEI - Snapshot Report): Midland, TX-based Clayton Williams Energy is primarily involved in E&P of oil and natural gas resources located in Texas, Louisiana, and New Mexico. The company’s total proved reserve as of Dec 31, 2013, was roughly 70 million barrels of oil equivalent (MMBOE).

The company has an earnings ESP of +4.97% and a Zacks Rank #1. The Zacks Consensus Estimate for the to-be-reported is pegged at $1.41 per share. 

Clayton Williams Energy is set to report its second quarter results on Jul 24, before the opening bell.

Noble Energy Inc. (NBL - Analyst Report): Headquartered in Houston, TX, Noble Energy is an oil and gas E&P company, engaged in the upstream operations globally. The total proved reserve of the company as of Dec 31, 2013 was 1,406 MMBOE.

Noble Energy’s second quarter prospect looks bright as it has an earnings ESP of + 1.28% and a Zacks Rank #3. The Zacks Consensus Estimate is 78 cents per share.

The company is set to report its second-quarter results on Jul 24, before the opening bell.

Encana Corporation (ECA - Analyst Report): Calgary, Alberta based Encana is a focused pure-play natural gas E&P company. It is the second largest gas producer in North America, and holds a highly competitive land and resource position in a number of the region's most promising shale and tight gas resource plays. This provides the company with a low risk, long-life, and sustainable growth profile. As of year-end 2013, Encana had 10.0 trillion cubic feet equivalent in proved reserves, of which roughly 86% was natural gas.

For the upcoming release, Encana has an earnings ESP of + 11.11% and a Zacks Rank #3. 

Encana – which has a Zacks Consensus Estimate of 27 cents for the second quarter – will release its results on Jul 24, prior to the opening bell.

Bottom Line

Although the oil and natural gas E&P companies are exposed to volatile commodity prices, we can say that the firms involved in upstream operations have a high chance of coming up with flying second quarter earnings. 

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