More than half of the S&P 500 members have reported their earnings results, giving us a fair idea of how the second-quarter 2017 earnings season will turn out to be. In this piece, we cover the performance of the oil/ energy sector in the April-June period and pick stocks that are expected to beat earnings estimates.
Almost half of the oil/energy companies belonging to the S&P 500 index have reported Q2 results. More than 80% of the firms witnessed a revenue beat while 50% surpassed earnings estimates. Before delving into the details, we will first analyze how crude and natural gas prices have behaved as the commodities primarily determine the fate of the energy players.
Favorable Crude & Gas Prices
The crude pricing scenario over the first two months of second-quarter 2017 was much improved from the year-ago period. Hopes of OPEC’s production cut deal extension was the prime factor driving the year-over-year hike in prices during April and almost the entirety of May. Market anticipations proved somewhat correct as OPEC and 11 non-OPEC players, including Russia, decided to extend the production cut deal until Mar 2018 in the Vienna meeting.
The same goes for natural gas as the average trading price of the commodity for each of the three months of the quarter was considerably better than the prior-year quarter. Thus, we can conclude that there was a modest recovery in natural gas prices during Q2 after the commodity hit its lowest annual average price during 2016 in almost 20 years, according to The U.S. Energy Information Administration.
Energy Sector to Contribute the Most
Per our report,as of July 28th, 48.5% of the energy companies belonging to S&P 500 Index have reported Q2 results with a remarkable 226.2% year-over-year earnings growth.
We have divided the S&P 500 Index into 16 Zacks Sectors. Among all the sectors, Oil/Energy is likely to be the biggest growth driver. While four of the sectors are projected to report a drop in year-over-year earnings, many are expected to see a minor hike. Meanwhile, the energy sector is projected to outshine the rest with year-over-year earnings growth of 249%.
Energy Players to Shine
The rise in oil and gas prices might encourage exploration and production companies to pump more of the commodities. This is because explorers will be able to sell oil and gas at higher prices. In fact, the rig count data provided by oilfield service firm Baker Hughes, a GE company (BHGE) showed that for each week in second-quarter 2017, shale drillers kept on adding rigs in the oil patches. More drilling is also expected to boost demand for oilfield service players that set up oil and gas wells.
Increased production of the commodities is likely to create more need for pipeline and gathering infrastructures for transporting and storing the surplus output of oil and gas. Hence, the second quarter could be favorable for midstream energy firms as well.
How to Make a Choice
Given the plethora of players in the Oil/Energy space, picking the right stock is a daunting task. But our proprietary methodology makes it fairly simple. One can narrow down the list with the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, which is the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. It helps in picking stocks that have high chances of delivering earnings surprises in their next earnings announcement.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Applying the above strategy, we have selected five energy stocks that have a greater possibility of posting an earnings beat in the coming days.
Switzerland-based Transocean Ltd. (RIG - Free Report) is the world’s largest offshore drilling contractor and leading provider of drilling management services. With the market for offshore rigs unlikely to turn around anytime soon, the company has been selling/stacking older rigs as well as investing in high-specification rigs in order to improve the quality of its fleet. It is to be noted that the company also surpassed the Zacks Consensus Estimate in the previous four quarters quarter.
The offshore driller – set to report second-quarter results on Aug 2, after the closing bell – has a Zacks Rank #3 and an Earnings ESP of +27.27%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Tulsa, OK-based Williams Partners LP (WPZ - Free Report) is a publicly traded master limited partnership with midstream infrastructure assets that are involved in transporting, gathering and processing natural gas and natural gas liquids. The partnership’s pipeline network carries the highest volumes of natural gas in the U.S.
For the upcoming release, the partnership – set to release results on Aug 2, after the closing bell – has an Earnings ESP of +7.32% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Calgary, Alberta, Enbridge Inc. (ENB - Free Report) is a leading energy infrastructure company. The company has the longest and most advanced crude and liquids pipeline system in the world.
The second quarter looks pretty encouraging for Enbridge as it has an Earnings ESP of +38.24% and a Zacks Rank #3. The expected earnings release date for the company is Aug 3, before the opening bell.
Canadian Natural Resources Limited (CNQ - Free Report) – headquartered in Calgary, Canada – is an upstream energy firms engaged in exploration and production of oil and natural gas in prospective resources situated in Western Canada, off the coast of Africa and U.K. region of the North Sea.
The company has a Zacks Rank #3 and an Earnings ESP of +19.05%. The company is expected to report second-quarter 2017 results on Aug 3, before the opening bell.
The Williams Companies Inc. (WMB - Free Report) is a premier energy infrastructure provider in North America. The company’s midstream assets, which are less sensitive to commodity prices, help the firm maintain a steady stream of revenue and cash flow even in the wake of low natural gas prices.
For the upcoming release, the company has an Earnings ESP of + 50.00% and a Zacks Rank #3. The midstream will release results on Aug 2, after the closing bell.
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