The Oil/Energy sector is one-third of its way through the Q3 earnings season. Let’s take a look at the factors influencing the quarterly results this time around.

Revenue & Earnings Comparison Relative to Q3 of 2020

Investors should know that there is a high correlation between commodity prices and the earnings of energy companies.

So, how does the price of oil and gas compare with the year-ago period?

According to the U.S. Energy Information Administration, in July, August and September of 2020, the average monthly WTI crude price was $40.71, $42.34 and $39.63 per barrel, respectively. In 2021, the average prices were $72.49 in July, $67.73 in August and $71.65 in September, i.e., much stronger year over year.

The news is even better on the natural gas front. In Q3 of 2020, the U.S. Henry Hub average natural gas prices were $1.77 per MMBtu in July and rose to $2.30 in August before tumbling to $1.92 in September. Coming to 2021, the fuel traded at $3,84, $4.07 and $5.16 per MMBtu in July, August and September, respectively. In other words, natural gas traded noticeably higher in all three months.

Considering the sharp rise in oil and gas prices, the picture looks rather upbeat for the Q3 earnings season. Per the latest Earnings Trends, energy is on track for positive earnings compared to losses a year earlier. Per our expectations, the sector is likely to have returned to profitability from third-quarter 2020 loss on 54.4% higher revenues.

Some Energy Firms to Perform Better Than Others

Energy investors have ample reasons to rejoice. In fact, with the surge in oil and natural gas prices, several companies could grow their bottom lines year over year. As a reflection of this, for the 30.4% S&P 500 companies that have already reported, total earnings are up an astounding 963.4% from the same period last year on 50.8% higher revenues.

But the positive backdrop notwithstanding, the bottom-line beat ratios so far are suggestive of a majority of companies reporting profits short of expectations. A mere 28.6% of the energy operators have managed to pull off a positive earnings surprise so far in the third quarter, with 57.1% beating revenue estimates. For example, biggies like Royal Dutch Shell and Kinder Morgan (KMI Quick QuoteKMI - Free Report) missed profit expectations despite all the help from strong commodity prices.

In other words, pricing gains do not necessarily indicate that all energy scrips have similar appreciation probability. Investing in companies with an earnings beat potential can fetch handsome returns. This is because a stock generally surges on an earnings beat.

How to Identify Potential Outperformers?

But with several energy firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings. While it is impossible to be sure about such outperformers, our proprietary methodology makes it fairly simple.

Our research shows that for stocks with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is our proprietary methodology for determining stocks, which have the best chances to surprise with their next earnings announcement. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Our Choices

One might start with APA Corporation (APA Quick QuoteAPA - Free Report) , which boasts a large geographically diversified reserve base with multi-year trends in reserve replacement. One of the largest oil producers in Permian, the company’s Suriname portfolio is exciting too, where it continues to achieve drilling success. The company, with an Earnings ESP of +0.42% and a Zacks Rank #1, is scheduled to release earnings on Nov 3. APA surpassed earnings estimates in each of the trailing four quarters, with the average being 36.7%.

You can see the complete list of today’s Zacks #1 Rank stocks here.
 

You may also consider EOG Resources (EOG Quick QuoteEOG - Free Report) , which is #1 Ranked with an Earnings ESP of +2.16%. The Houston, TX-based company is a top-tier U.S. shale play. The United States accounts for more than 92% of the total production volumes, with the Eagle Ford and Delaware Basin being the primary contributors. Internationally, the company has operations in China and Trinidad. EOG is scheduled to release earnings on Nov 4. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on each occasion, the surprise being 70.1%, on average.
 

Targa Resources (TRGP Quick QuoteTRGP - Free Report) also deserves mention. The stock has a Zacks Rank of 1 and an Earnings ESP of +4.00%. Targa boasts an attractive portfolio of energy infrastructure assets, including a leading position in the Mont Belvieu natural gas liquids (“NGL”) hub that generates stable and recurring fee and tariff-based revenues. The company is also well-diversified geographically with its assets serving some of the most attractive oil and gas formations across the United States, and linked with major NGL hubs and logistics centres. Targa beat earnings estimates in two of the last four quarters and missed in the other two — the earnings surprise being 41.4%, on average. The company is set to release results on Nov 4.
 

Another worthwhile option is Continental Resources , which is a leading oil and gas producer in North Dakota’s Bakken Shale. The company — Zacks #1 Ranked with an Earnings ESP of +0.90% — has been able to limit well costs and improve capital efficiency. Reflecting its deep inventories, Continental has over two million net reservoir acres across the Bakken, Oklahoma and Powder River Basin. The upstream operator is scheduled to release earnings on Nov 3. Continental beat the Zacks Consensus Estimate thrice in the last four quarters and missed in the other, ending up with a negative earnings surprise of 35.6%, on average.
 

Finally, we have Whiting Petroleum , whose core operations are focused in North Dakota's Williston Basin, with an enviable acreage of top-tier assets and a multi-year drilling inventory. The energy explorer’s steadily improving drilling efficiency has driven down cash costs and led to attractive cash flows. The company, with an Earnings ESP of +5.63% and a Zacks Rank #1, is scheduled to release earnings on Nov 4. Whiting Petroleum surpassed earnings estimates in each of the trailing four quarters, with the average being 3,711.2%.