We expect Anadarko Petroleum Corporation to beat expectations when it reports second quarter 2016 results after the market closes on Jul 26. Last quarter, this oil and natural gas exploration and production (E&P) company had reported a positive surprise of 5.9%. In fact, the company has posted a positive surprise in three of the trailing four quarters, with an average positive surprise of 38.4%

Why a Likely Positive Surprise?

Our proven model shows that Anadarko is likely to beat estimates this season because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat estimates, and Anadarko has the right mix.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +11.40%. This is because the Most Accurate estimate stands at a loss of 70 cents, while the Zacks Consensus Estimate is pegged at a loss of 79 cents. This is a meaningful indicator of a likely positive earnings surprise.

Zacks Rank: Anadarko’s Zacks Rank #2, when combined with a positive ESP, makes us reasonably confident of positive surprise this quarter.

Conversely, Sell-rated stocks (#4 or #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Factor to Consider                                                             

In order to survive the changing market dynamics, Anadarko has resorted to asset monetization and cost reduction efforts. By first quarter end, the company had monetized $1.3 billion of assets and by the end of the second; it is expected to shed another $700 million. The net proceeds will enable the company to brave the volatile commodity pricing environment and may even accommodate some expenditure in certain plays.

The company expects capital expenditure to be $700–$800 million in the second quarter, reflecting a 50% reduction from the year-ago levels. However, thanks to operational strength, Anadarko expects average daily sales volume in the range of 780,000–802,000 BOE/d for the second quarter, up from 685,000 BOE/d in the prior-year period. Oil price recovery in the second quarter is expected to benefit the company.

Further, the company has lowered its overhead costs, enabling it to achieve operating and capital efficiencies. These cost saving initiatives will pay off in the second quarter.

Stocks that Warrants a Look

Here are few other stocks that you may want to consider, as our model shows that they too have the right combination of elements to post an earnings beat this quarter:

Murphy Oil Corporation (MUR Quick QuoteMUR - Free Report) has an Earnings ESP of +13.50% and a Zacks Rank #2. The company will report quarterly results on Jul 27.

Noble Energy, Inc. has an Earnings ESP of +6.25% and a Zacks Rank #2. The company will report quarterly results on Aug 3.

WPX Energy, Inc. has an Earnings ESP of +30.00% and a Zacks Rank #2. The company will report quarterly results on Aug 4.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>