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5 Energy Stocks to Watch for Gains This Earnings Season

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Oil prices dropped to two-month lows of around $45-a-barrel on Friday over indications of resurgence in shale drilling activities and signs of economic sluggishness in Asia. A strong dollar – which makes the greenback-priced crude dearer for investors holding foreign currency – also played spoilsport. As it is, traders are concerned over the effects of Brexit – the short way of saying Britain’s exit from the EU – on crude demand.

Despite the recent weakness, oil prices have gained handsomely since plunging to its lowest point in a decade earlier this year.

The Multi-Month Oil Price Rally

Crude prices, which reached $110 per barrel in mid-2014, fell to a 12-year low of $26.21 in February as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer’s profit margins.

However, indications that supply was easing helped oil prices rebound some 90% since then and took the commodity past $50.

The surge in benchmark crude was being driven by supply outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude.

The upward pressure in oil prices also reflect the U.S. Energy Department's recent inventory releases that show crude stockpile builds turning into draws. Things have been further helped by a continued decline in U.S. crude production.

Q2: Best Quarter in 7 Years

Unlike the previous few quarters, second-quarter 2016 turned out to be a rather good one with crude advancing more than 26% sequentially -- the best quarterly percentage gain in 7 years. West Texas Intermediate (WTI) crude futures during the Apr–Jun 2016 period hovered mostly between $40 and $50 per barrel.

All's Not Well, Though

Despite oil’s massive recovery since February, it’s still under $50 – about half the level of two years ago – and far below the breakeven price for many energy companies. Therefore, the commodity is not yet out of the woods.

Even the industry, which is cutting deeper, seems to think so. Companies around the world continue to slash jobs, defer/cancel projects worth billions of dollars and renegotiate contracts with suppliers to help protect their balance sheets.

Consequently, things are looking bleak for the upcoming Q2 earnings season. The Oil/Energy sector’s earnings are expected to crash 76.8% from the second quarter 2015 levels, while the top-line is likely to show a drop of 27%.

How to Identify the Outperformers?

Despite the miserable figures, there are a number of companies that are likely to beat our second quarter earnings estimates.

Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon an earnings beat.

But with a wide range of 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 – Earnings ESP – makes it relatively simple.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with 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%.

5 Stocks to Invest In

With the help of the Zacks Stock Screener, we have zeroed-in on five energy stocks that sport a Zacks Rank #1 (Strong Buy) or 2 (Buy) and flaunt an Earnings ESP of at least 3.5%. Moreover, the chosen ones have market capitalization greater than $1 billion, as it helps us to focus on companies that have strong liquidity.

McDermott International Inc. : Incorporated in 1959, Houston, TX-based McDermott International is an engineering and construction company, solely focused on the offshore oil and gas business.

Zacks Rank #1

Earnings ESP: +100%

Expected Earnings Release Date: Aug 8

Apache Corp. (APA - Free Report) : Founded in 1954, Houston, TX-based Apache is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids.

Zacks Rank #2

Earnings ESP: +47.37%

Expected Earnings Release Date: Aug 4

Newfield Exploration Co. : Newfield Exploration, based in Woodlands, TX, is an independent energy company engaged in the exploration and production of crude oil and natural gas.

Zacks Rank #2

Earnings ESP: +30%

Expected Earnings Release Date: Aug 2

Marathon Oil Corp. (MRO - Free Report) : Houston, TX-headquartered Marathon Oil is a leading upstream energy player whose business is organized into three segments – North America Exploration and Production, International Exploration and Production, and Oil Sands Mining.

Zacks Rank #2

Earnings ESP: +7.41%

Expected Earnings Release Date: Aug 3

Hess Corp. (HES - Free Report) : New York-based Hess is engaged in exploration, development, production, transportation, purchase and sale of crude oil, natural gas liquids, and natural gas.

Zacks Rank #2

Earnings ESP: +6.20%

Expected Earnings Release Date: Jul 27

Bottom Line

Despite the sharp volatility in oil prices, there are certain energy companies that are primed to outperform the Zacks Consensus Estimate. They certainly hold the potential to make investors standout gains even in these capricious times.

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