Leading upstream energy firm Marathon Oil Corp. (MRO Quick QuoteMRO - Free Report) is set to release its second-quarter 2016 results after the closing bell on Wednesday, Aug 3.

In the preceding three-month period, the Houston, TX-based company delivered a positive earnings surprise of 8.51% despite the challenges that a steep drop in oil price tagged along. The better-than-expected results came thanks to solid production (at the upper end of guidance) and cost control initiatives.

As far as the earnings surprise history is concerned, the company has an excellent record: its beaten estimates in each of the last four quarters with an average beat of 19.93%.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

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 seven years – while natural gas prices jumped 49%, the most since 2005. Marathon Oil’s business will undoubtedly gain from this uptick.

Last quarter, the company’s exploration expenses came at $24 million, significantly lower than $90 million in the year-earlier quarter. Moreover, Marathon Oil’s total quarterly cost and expenses fell 30% to 1,328 million. We expect the company to perform well on the cost front in the to-be-reported quarter as well.

However, Marathon Oil’s decision to cut its capital expenditure by half will lead to production decline. While exploration expenses will be limited, the company will only spend on completing existing projects internationally. 

Finally, despite recovering from multi-year lows, both oil and natural gas prices are below year-ago levels, thereby affecting profitability.

Earnings Whispers

Our proven model does not conclusively show that Marathon Oil will beat estimates this quarter. That is because 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 consensus estimates. That is not the case here as you will see below.     

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at a loss of 24 cents.

Zacks Rank: Marathon Oil has a Zacks Rank #2. Though a Zacks Rank #2 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Marathon Oil, here are some domestic upstream you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Concho Resources Inc. has an Earnings ESP of +33.33% and a Zacks Rank #2. The company is anticipated to release earnings on August 2.

Legacy Reserves L.P. has an Earnings ESP of +12.50% and a Zacks Rank #2. The company is expected to release earnings results on August 3.

Devon Energy Corp. (DVN Quick QuoteDVN - Free Report) has an Earnings ESP of +4.55% and a Zacks Rank #2. The company is likely to release earnings on August 2.

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