We are entering the heart of the Q1 earnings season, with more than 50% S&P 500 members expected to come out with results by the end of next week.
Picture Emerging Thus Far
We now have Q1 results from 57 S&P 500 members that combined account for 16.2% of the index’s total market capitalization. According to our latest Earnings Outlook report, total earnings for these companies are up 18.7% from the same period last year on 6.4% higher revenues, with 75.4% positive earnings surprises and 54.4% beating revenue estimates.
At this stage, we don’t have any results from the ‘Energy’ sector. However, quite a few companies have earnings lined up to release results pretty soon, and events are shaping up quite nicely for their report.
With a market-thumping 24% return, 'Energy' was the top performing S&P sector in 2016. The incredible gains of last year stoked high expectations going into 2017.
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 incurred 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 Lead 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 eight 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 two 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 upcoming 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 an impressive growth of 32.4% from the first-quarter 2016 levels.
Stocks to Watch for Earnings on Apr 24
Let’s see what’s in store for four energy companies expected to come up with first-quarter numbers on Monday, Apr 24.
One of the largest oilfield service providers in the world, Halliburton Co. (HAL - Free Report) is expected to report before the opening bell.
In the fourth quarter of 2016, this Houston, TX-headquartered provider of equipment, maintenance, and engineering and construction services beat estimates handily, helped by continued and effective cost management.
Coming to earnings surprise history, the company has an excellent record: it’s been ahead of estimates in each of the last four quarters.
However, earnings beat looks unlikely for Halliburton 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.
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, Halliburton has an Earnings ESP of -25.00%, while it carries a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult. (Read more: Will Halliburton Q1 Earnings Reflect Rising Costs?)
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.
Headquartered in Calgary, Alberta, Precision Drilling Corp. (PDS - Free Report) is another oilfield services provider set to report first-quarter 2017 results ahead of market opening. The company – which supplies its customers in the oil and gas industry with drilling, completion and production services – has an excellent track of having outperformed estimates in each of the last four quarters.
But our model does not indicate that Precision Drilling is likely to beat on earnings this time around, as it has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can see the complete list of today’s Zacks #1 Rank stocks here.
We then have upstream entity Range Resources Corp. (RRC - Free Report) coming up with quarterly numbers after the closing bell. Based in Fort Worth, TX, Range Resources is an independent energy producer, with primary focus on the southwestern, Appalachian and Gulf Coast regions of the U.S.
While lower commodity prices pushed the company to a fourth-quarter loss, the situation is likely to reverse this time around.
Powered with the right combination of the two key ingredients – an Earnings ESP of +47.06% and a Zacks Rank #3 – our proven model shows that an earnings beat is expected for Range Resources in the to-be-reported quarter.
Lastly, there is pipeline operator NuStar Energy L.P. (NS - Free Report) coming up with Jan-Mar operational results before the opening bell. Structured as a master limited partnership, NuStar engages in the transportation and storage of crude oil as well as refined products in the U.S., the Netherlands Antilles, Canada, Mexico, and the U.K.
As far as earnings surprises are concerned, the partnership is on a bit of a slippery surface, having failed to beat the Zacks Consensus Estimate in the last two reports.
Our model does not indicate that NuStar is likely to beat on earnings this time around too, as it has a Zacks Rank #3 and an Earnings ESP of 0.00%. While a Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.
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