We have reached the final stretch of the Q3 earnings season with results from 364 S&P 500 members that combined account for more than 78% of the index’s total market capitalization.
Q3 Reflects Improving Trends in Growth
Total earnings for these companies are up 1.6% from the same period last year on 1.6% higher revenues, with 72.3% positive earnings surprises and 54.7% beating revenue estimates. (Data from the Earnings Outlook dated Nov 2, 2016).
A 1.6% quarterly earnings growth may look quite insignificant but what’s encouraging is that the figure is a considerable improvement over the ones observed over the previous 5 quarters. Should the positive trend continue throughout the quarter, it will represent the first positive growth for the S&P 500 index after 5 quarters of back-to-back declines.
Energy: Another Quarter of Weak Results
Expectedly, the ‘Oils/Energy’ sector has been a big drag on the aggregate growth picture. For the 75% sector components on the S&P 500 index that have reported Q3 results – including behemoths like Exxon Mobil Corp. (XOM - Free Report) and Chevron Corp. (CVX - Free Report) – total earnings are down 61.8% on 12.8% lower revenues.
However, despite being the largest decliner among major sectors, an overwhelming 70.4% Oils/Energy companies have beaten earnings estimates – though undoubtedly aided by low expectations.
Oil & Gas Performance in Q3
Unlike the last quarter, in which oil advanced more than 26% sequentially to notch up the best quarterly percentage gain in seven years, the Jun-Sep 2016 period turned out to be a rather flat one with crude barely advancing. In fact, the West Texas Intermediate (WTI) crude futures during the third quarter hovered around the $45 per barrel mark, flat with the second quarter and down from $46.50 in the same period last year.
On the other hand, natural gas popped through the $3 barrier for the first time in more than a year during the third quarter. Successive below-average builds with strong power sector consumption have been cutting into the year-over-year storage surplus. In fact, natural gas prices have doubled since hitting 17-year lows of around $1.6 per MMBtu in the first quarter.
Overall, the earnings picture for energy stocks look rather uncertain.
Stocks to Watch for Earnings on Nov 7
Let’s see what’s in store for four such companies expected to come up with third-quarter numbers on Monday, Nov 7. Let’s take a look at how things are shaping up at their end.
An independent exploration and production company with focus on oil-weighted assets in the Williston Basin, Oasis Petroleum Inc. (OAS - Free Report) is expected to report third-quarter 2016 results after the closing bell.
In the preceding three-month period, the Houston, TX-based oil and natural gas finder beat earnings estimates, helped by operating efficiency and cost reduction.
Coming to earnings surprise history, the company has a good record: it beaten/met estimates in three of the last four quarters, resulting in an average positive surprise of 6.67%.
But an earnings beat is uncertain for Oasis Petroleum this time around. This is because, as per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat earnings. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.
Simultaneously, 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.
For the quarter to be reported, Oasis Petroleum has an Earnings ESP of 0.00%, while it carries a Zacks Rank #3. While a Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kosmos Energy Ltd. (KOS - Free Report) is another upstream energy player to report third-quarter results Monday – this time before the market open.
Headquartered in Hamilton, Bermuda, Kosmos Energy is a leading independent oil and gas exploration and production company focusing on frontier and emerging areas along the Atlantic Margin.
Kosmos Energy’s active exploration program, strong balance sheet and attractive hedge position helped it top earnings estimates in the last two quarters. With an Earnings ESP of +12.50% and Zacks Rank #3, our proven model shows that an earnings beat is likely for Kosmos Energy in the to-be-reported quarter as well.
Then we have energy partnership Viper Energy Partners L.P. (VNOM - Free Report) coming out with third-quarter numbers on Nov 7 post market close.
Midland, TX-based Viper Energy Partners owns mineral interests across oil and gas properties primarily in the Permian Basin.
Regarding earnings surprise history, the partnership can boast of a good track record: its beaten/met estimates in each of the last four quarters at an average rate of +19.79%.
However, our model indicates that Viper Energy Partners is unlikely to beat on earnings this time. This is because the partnership has an Earnings ESP of 0.00% and a Zacks Rank #3.
Lastly, there is SemGroup Corp. (SEMG - Free Report) releasing quarterly numbers on Monday morning. Founded in 2007, the Tulsa, OK-based company is a midstream services provider across the U.S., Canada and Mexico.
Coming to earnings surprise history, SemGroup has a mixed track record: its outperformed estimates in two of the last four quarters at an average rate of +59.15%.
We expect the midstream operator to beat earnings expectations in the third quarter as our proven model shows that it has the right combination the two key components – a Zacks Rank #3 and an Earnings ESP of +84.62%.
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