While it is still quite early in the Oil/Energy sector’s Q1 reporting cycle, we believe that the earnings picture is strong. With a strong fundamental backdrop, certain companies are poised to beat estimates this earnings season, with events shaping up quite nicely for their report. Based on our exclusive research and unique market insight, we present five stocks — Murphy USA (MUSA Quick QuoteMUSA - Free Report) , Hess Corporation (HES Quick QuoteHES - Free Report) , EQT Corporation (EQT Quick QuoteEQT - Free Report) , Helmerich & Payne (HP Quick QuoteHP - Free Report) and Chevron (CVX Quick QuoteCVX - Free Report) — likely to take advantage of the positive post-announcement price reaction.   

But it’s worth taking a look at the factors influencing the quarterly results this time around first.

Revenue & Earnings Comparison Relative to Q1 of 2021

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 January, February and March of 2021, the average monthly WTI crude price was $52, $59.04 and $62.33 per barrel, respectively. In 2022, average prices were $83.22 in January, $91.64 in February and $108.50 in March, i.e., much stronger year over year.

The news is also bullish on the natural gas front. In Q1 of 2021, U.S. Henry Hub average natural gas prices were $2.71 per MMBtu in January and soared to $5.35 in February before falling all the way down to $2.62 in March. Coming to 2022, the fuel traded at $4.38, $4.69 and $4.90 per MMBtu in January, February and March, respectively. In other words, natural gas traded noticeably higher in two of the three months.

Considering the sharp rise in oil and gas prices, the picture looks rather upbeat for the Q1 earnings season. Per the latest Earnings Trends, energy is on track for a big earnings boost compared to a year earlier. Per our expectations, the sector’s bottom line is likely to have surged 211.9% from first-quarter 2021 on 38.4% 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 see their bottom lines grow year over year. As a reflection of this, for the 7.7% S&P 500 companies that have already reported, total earnings are up 75.9% from the same period last year on 10.8% higher revenues.

Despite this positive backdrop, the bottom-line beat ratios so far have been quite disappointing. In fact, none of the S&P 500 energy companies in this early cycle have reported profits ahead of expectations, even though 50% have managed to outperform revenue estimates. Clearly, inflationary cost pressures have been bigger than expected.

In other words, pricing gains do not necessarily indicate that all energy scrips have a similar earnings beat potential. And it’s no secret that a good bottom-line performance is often a precursor to a stock’s ability to appreciate. Therefore, investing in companies with earnings beat potential can fetch handsome returns. This is because a stock generally surges on earnings beat.

How to Identify Potential Outperformers?

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 Murphy USA, which is a leading independent retailer of motor fuel and convenience merchandise in the United States. A low-cost, high-volume fuel seller, Murphy USA's stations are located near Walmart supercentres.

MUSA, with an Earnings ESP of +35.20% and a Zacks Rank #1, is scheduled to release first-quarter earnings on May 3. Murphy USA beat the Zacks Consensus Estimate in each of the last four quarters, which resulted in an earnings surprise of 24.6%, on average.

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

You may also consider Hess Corporation, which is #1 Ranked too with an Earnings ESP of +10.25%. The New York-based company is mainly engaged in the exploration and production of hydrocarbons from the Bakken shale and the Stabroek project offshore Guyana. Of late, Hess has made multiple world-class oil discoveries at the Stabroek Block off the north coast of South America.

Hess is scheduled to release earnings on Apr 27. It beat the Zacks Consensus Estimate for earnings in three of the last four quarters but missed once, which resulted in an earnings surprise of 30.7%, on average.
 

EQT Corporation also deserves mention. The stock has a Zacks Rank of 2 and an Earnings ESP of +1.77%. EQT Corp. is a pure-play Appalachian explorer that produces the largest volume of natural gas in the United States. The company’s core resources comprise a huge inventory of drilling locations that will fetch volumes over the next 15 to 20 years.

EQT Corp. beat earnings estimates in three of the last four quarters, the earnings surprise being 101.6%, on average. The company is set to release results on Apr 27.
 

Another worthwhile option is Helmerich & Payne, engaged in the contract drilling of oil and gas wells in the United States and internationally. Helmerich & Payne supplies drilling rigs, equipment, personnel, and camps on a contractual basis to explore for and develop energy from onshore and offshore areas.

HP — Zacks #2 Ranked with an Earnings ESP of +8.14% — is scheduled to release earnings on Apr 27. Helmerich & Payne beat the Zacks Consensus Estimate twice in the last four quarters, met once and missed in the other, ending up with a negative earnings surprise of 2.7%, on average.
 

Finally, we have Chevron, which is one of the largest publicly traded oil and gas companies in the world with operations that span almost every corner of the globe. The only energy component of the Dow Jones Industrial Average, San Ramon, CA-based CVX is fully integrated, meaning it participates in every aspect related to energy – from oil production, to refining and marketing.

Chevron, with an Earnings ESP of +2.18% and a Zacks Rank #2, is scheduled to release earnings on Apr 29. CVX surpassed earnings estimates in two of the trailing four quarters, with the average being 6.3%.