Markets are a little more than halfway through the Q1 earnings season, with 57.6% S&P 500 members having reported results as of Friday, Apr 28.

Picture Emerging Thus Far

We now have Q1 results from 288 S&P 500 members that combined account for 63.8% of the index’s total market capitalization. According to our latest Earnings Preview, total earnings for these companies are up 13.7% from the same period last year on 8.2% higher revenues, with 76.4% delivering positive earnings surprises and 68.1% beating revenue estimates.

Energy Earnings Soar

The ‘Energy’ sector has been off to a spectacular start. For the 48.5% sector components on the S&P 500 index that have reported Q1 results, total earnings surged 360% on 30.7% higher revenues. While three-fourths of the companies have been successful in beating earnings estimates, 56.3% of them have outperformed the top line.

Let's take a look at how oil and gas prices behaved during the first three months of this year.

Q1 Report Card: Prices Move Lower but Recover from Year-Ago Lows

Despite hope offered by the biggest oil deal in a decade and a new pro-fossil fuel administration in the White House, crude prices logged a loss of almost 6% for the first quarter as traders focused on the rising flood of U.S. shale-driven production.

In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more. With the recent uptick in U.S. shale production putting more pressure on the market, oil ended the first quarter at $50.60 per barrel, 5.8% lower than year-end 2016 prices.

Natural gas fared worse, dropping more than 14% in the Jan-Mar period, thanks to one of the mildest winters on record. A warmer winter translated into tepid requirement for the heating fuel and upended demand forecasts.

Despite the sequential fall, both oil and natural gas prices are in a sweet spot compared to the corresponding period of 2016. While crude slumped to a 12-year low, natural gas futures dropped to its worst level in almost 17 years.

Year-over-Year Gains Leads to Bullish Expectations

Ending the dismal trend from the past few quarters, a look back at the Q4 earnings season reflects that the overall results of the Oil/Energy sector finally turned the corner, driving the aggregate growth picture for the S&P 500 index.

The Oct-Dec 2016 period turned out to be a rather good one with the OPEC deal and extreme weather conditions engineering a hefty rise in oil and gas prices during the fourth quarter.

A historic OPEC production cut agreement, together with help from non-OPEC producers saw oil prices end the year at $53.72 a barrel, representing a gain of 11.4% sequentially and 45% for the year. Meanwhile, natural gas embarked on its own upward journey, with futures jumping around 25% just in the fourth quarter. Ending the year at $3.724 per million Btu (MMBtu) – up 59% from 2015 – the heating fuel was buoyed by a cold snap that translated into strong demand.

As a result, following 8 back-to-back quarters of earnings declines, analysts said that the sector was likely to get better in the fourth quarter and clock its first positive earnings growth after 2 years. With estimate revisions going up following OPEC’s Algeria grandstand, the Oil/Energy sector’s earnings were expected to improve handsomely from the fourth quarter 2015 levels.

True to the predictions, the sector came out swinging. For the sector components on the S&P 500 index, total Q4 earnings were up 17.1% on 2.0% higher revenues.

The picture looks rather encouraging for the ongoing Q1 earnings season as well. This is not surprising, considering that oil and gas both fell to multi-year lows in the year-ago period. In fact, the 'Energy' sector is set to turn around from a modest loss in the year-earlier period to improving positive earnings this quarter.

Importantly, as per our analysis, the aggregate dollar amount of earnings increase for the Energy sector is the highest of all 16 Zacks sectors, with Energy expected to earn a total of $7.7 billion in Q1 against a loss $1.6 billion in the year-earlier quarter. The top line is likely to show impressive growth of 29.8% from the first quarter 2016 levels, while margins are set to improve 4.4%.

Stocks to Watch for Earnings on May 4

Let’s see what’s in store for four energy companies expected to come up with Mar quarter numbers on Thursday, May 4.

Firstly, there is Apache Corp. (APA Quick QuoteAPA - Free Report) – one of the world’s leading explorer and producer of natural gas, crude oil and natural gas liquids – which is expected to report before the opening bell. 

In the fourth quarter of 2016, this Houston, TX-headquartered upstream player reported a surprise loss on a dip in output due to a conservative capital budget. Coming to earnings surprise history, the company has a mixed record: its underperformed estimates in two of the last four quarters, resulting in an average negative surprise of 19.89%.

Worryingly, our model does not indicate that Apache is likely to beat on earnings this time around too. This is because, as per our proven model, a stock needs to have both a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat earnings. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

For the quarter to be reported, Apache has an earnings ESP of -11.11%, making surprise prediction difficult. The company’s Zacks Rank #4 (Sell) further decreases the predictive power of ESP, making us less confident of an earnings surprise call.  

As it is, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

We also have Oklahoma City, OK-based Chesapeake Energy Corp. (CHK Quick QuoteCHK - Free Report) coming out with first-quarter 2017 results ahead of market opening. As far as earnings surprise history is concerned, Chesapeake – the second largest natural gas producer in the U.S. with main focus on onshore resources – has a good track of having outperformed estimates in three of the last four quarters.

But with an Earnings ESP of -10.53% and Zacks Rank #3, our proven model shows that an earnings beat is not guaranteed for Chesapeake Energy in the to-be-reported quarter.

Marathon Oil Corp. (MRO Quick QuoteMRO - Free Report) is another leading oil and natural gas exploration and production company scheduled to report quarterly numbers – this time after the market close.

While aggressive cost reduction and strong operational execution drove the company to outperformances in each of the past four quarters, the trend might not continue this time around. With an Earnings ESP of -12.50% and a Zacks Rank #3, our proven model shows that an earnings beat is uncertain for Marathon Oil in the upcoming quarterly release. (Read more: What's in the Cards for Marathon Oil in Q1 Earnings?)

Lastly, there is Occidental Petroleum Corp. (OXY Quick QuoteOXY - Free Report) coming up with Jan-Mar operational results before the opening bell. An integrated oil and gas company with significant exploration and production exposure, Houston, TX-based Occidental Petroleum is also a producer of a variety of basic chemicals, petrochemicals, polymers and specialty chemicals.

As far as earnings surprises are concerned, the company has a bad track of having missed estimates thrice in the last four quarters. And our model does not indicate that Occidental Petroleum is likely to beat on earnings this time around, as it has a Zacks Rank #3 and an Earnings ESP of -35.71%. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult. (Read more: Occidental Petroleum Q1 Earnings: What's in Store?)

The Best & Worst of Zacks

Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +25% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 6X worse than the market.  See these critical buys and sells free >>