The fourth-quarter earnings season is on its last leg, with reports from the majority of the S&P 500 members on board. Most of the energy majors like ExxonMobil Corporation (XOM), Chevron Corporation (CVX), Royal Dutch Shell plc (RDS.A) and BP plc (BP) have announced their respective quarterly results.
Let’s focus on the oil and gas price movement during the October–December quarter of 2016 as the commodity prices primarily determine the fate of energy companies.
Favorable Oil & Gas Prices in Q4
We believe that the fourth quarter of 2016 was favorable for the energy sector. This was mainly because OPEC agreed to cut output for the first time since 2008 with an intention to curb the prolonged supply glut and improve oil prices. Adding to the optimism, oil producers outside the cartel also came forward for the first time in 15 years to strike the historic deal with OPEC and jointly curb production.
With the historic agreement, crude improved through December and traded mostly above the psychological mark of $50 per barrel mark. We note that in December oil prices advanced on both year over year and sequential basis.
Natural gas prices also improved substantially from the 17-year lows of around $1.6 per million British thermal units (MMBtu) during the January–March period of 2016. In fact, the commodity price touched the psychological mark $3 per MMBtu and traded above this level throughout December, mainly due the forecast of colder temperature. This apart, the pricing scenario was much better than the previous year and the prior quarter.
Positive Earnings Growth for the Energy Sector
Following eight quarters of earnings decline, the tide finally turned for the energy sector in the October–December quarter of 2016. For the sector participants enlisted on the S&P 500 Index that reported Q4 results, total earnings grew 14.7% on 3.1% higher revenues.
Most importantly, Irving, TX-based ExxonMobil Corporation’s solid fourth-quarter numbers, which more than offset smaller rival Chevron Corporation’s underperformance, led the Energy sector to witness growth in the quarter.
Choosing the Right Stock
As already mentioned, improvement in commodity prices might drive growth for exploration and production (E&P) companies. This is because E&P companies could sell the commodities at higher prices, generating significant cash flows for their stockholders. Additionally, higher productions will likely lead to the employment of midstream properties for gathering and transportation.
In such a scenario, selecting energy stocks with good prospects is by no means an easy task. Our proprietary methodology, however, makes it fairly simple. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of posting a positive earnings surprise is as high as 70%.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
4 Prominent Picks
Headquartered in Fort Worth, TX, Approach Resources Inc. (AREX - Free Report) is an upstream energy company involved in the exploitation and development of unconventional oil and gas resources in the U.S.
The company is likely to beat fourth-quarter earnings estimates as it has an Earnings ESP of +11.11% and a Zacks Rank #3. The company is expected to report fourth-quarter results after the closing bell on Mar 9.
Sanchez Production Partners LP – headquartered in Houston, TX – is engaged in E&P. The partnership also owns midstream assets that gather and process oil and gas. Sanchez will likely report fourth-quarter results on Mar 29.
The partnership is projected to beat the Zacks Consensus Estimate as it has an Earnings ESP of +42.74% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Waltham, MA, Global Partners LP (GLP - Free Report) has operations like transportation of petroleum products via rail routes.
The partnership is set to release fourth-quarter results on Mar 9, before the opening bell. We expect Global Partners to surpass expectations as it has an Earnings ESP of +10.92% and a Zacks Rank #2.
YPF SA (YPF - Free Report) – based in Buenos Aires, Argentina – is an integrated energy company.
The company, with Zacks Rank #3 and Earnings ESP of +23.08%, is likely beat the Zacks Consensus Estimate in the fourth quarter. The company is anticipated to release its financial results on Mar 2.
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