Markets are a little more than halfway through the Q2 earnings season, with 57.2% S&P 500 members having reported results as of Friday, Apr 28.
Picture Emerging Thus Far
We now have Q2 results from 286 S&P 500 members that combined account for 68.8% of the index’s total market capitalization. According to the latest Earnings Preview, total earnings for these companies are up 11.3 from the same period last year on 6.1% higher revenues, with 74.5% positive earnings surprises and 69.2% beating revenue estimates.
Energy Earnings Soar
The ‘Energy’ sector has been off to a spectacular start. For the 48.5% sector components on the S&P 500 index that have reported Q2 results, total earnings surged 226.2% on 15.5% higher revenues. While 50% of the companies have been successful in beating earnings estimates, 81.3% outperformed the top line.
Energy: First Half Recap
Last year, 'Energy' was the strongest S&P sector performer, with a market-thumping 24% return. In particular, November's historic OPEC-led production cut deal to alleviate a supply glut managed to buoy oil prices and stabilize them around the psychologically important $50 per barrel threshold. The commodity was on a stellar run on optimism surrounding the agreement, and the outlook for oil stocks was getting better.
The seemingly positive developments encouraged investors to bet on firming prices for 2017 with the oil industry finally hoping that 'this would be the year.' True to the strong sentiments, U.S. oil prices reached around $55 per barrel in late February, the highest level in 19 months.
However, the situation is drastically different now, with the commodity floundering in recent weeks. By Jun 21, crude had cratered more than 20% from its February highs and officially plunged into bear territory. In fact, prices ended down 14.3% for the first half of the year – the worst performance since 1998.
Let's take a look at how oil and gas prices behaved during the second quarter of this year.
Strong Q2 Earnings Growth Prediction
A look back at the Q1 earnings season reflects that the overall results of the Oil/Energy sector were spectacular, driving the aggregate growth picture for the S&P 500 index.
The Jan-Mar 2017 period turned out to be a rather good one with both oil and natural gas prices benefiting from easier comparison figures from the year-ago period. While crude slumped to some 12-year low in the first quarter of 2016, natural gas futures dropped to its worst level in almost 17 years.
As a result, the sector – whose year-earlier comparison was to an aggregate loss – came out swinging. For the sector components on the S&P 500 index, total Q1 earnings saw robust year-over-year dollar growth on 33.8% higher revenues. While 69.7% of the companies were successful in beating earnings estimates, 63.6% outperformed the top line.
The picture looks rather encouraging for the upcoming Q2 earnings season as well. This is not surprising, considering that oil and gas are both averaging higher compared to the second quarter of 2016 when the energy companies reported unusually low bottom line. While earnings for the Oil/Energy sector are set to jump a massive 249.0% – the highest year-over-year growth among all sectors – the top line is likely to show an improvement of 16.5% from the second-quarter 2016 levels.
Stocks to Watch for Earnings on Aug 2
Let’s see what’s in store for four energy companies expected to come up with June quarter numbers on Wednesday, Aug 2, after market close.
First, we have energy infrastructure provider The Williams Companies Inc. (WMB - Free Report) . In the previous quarter, this Tulsa, OK-headquartered transporter of oil and gas missed estimates, weighed down by rising costs and expenses.
Regarding earnings surprises, The Williams Companies has a decent record, having missed the Zacks Consensus Estimate just once in the last four reports. And our model indicates that the company is likely to beat on earnings this time around too.
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 estimates. 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, The Williams Companies has an Earnings ESP of +50.00% and a Zacks Rank #3, wh the right combination of two key ingredients. (Read more: Is Williams Companies Poised for a Beat in Q2 Earnings?)
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 Houston, TX, Occidental petroleum Corp. (OXY - Free Report) is another energy player set to report second-quarter 2017 results. The company – with significant exploration and production exposure, together with chemical and midstream operations – has a mixed track of having outperformed estimates in two of the last four quarters.
However, Occidental Petroleum is not expected to add to its positive surprises in the to-be-reported quarter. This is because the company has a Zacks Rank #4 and an Earnings ESP of 0.00%. (Read more: Is Disappointment Likely for Occidental in Q2 Earnings?)
Then there is Houston, TX-based leading upstream energy firm Marathon Oil Corp. (MRO - Free Report) coming up with April-June operational results.
As far as earnings surprises are concerned, Marathon Oil – whose business is organized into North America and International segments – has an excellent history, having gone past the Zacks Consensus Estimate in each of the last four reports. However, with an Earnings ESP of -7.14% and a Zacks Rank #4, our proven model shows that an earnings beat is unlikely for Marathon Oil in the upcoming quarterly release. (Read more: Will Marathon Oil Disappoint Investors in Q2 Earnings?)
Lastly, we have Concho Resources Inc. (CXO - Free Report) reporting second-quarter 2017 results. Coming to the earnings surprise history, this Midland, TX-headquartered energy explorer – with producing properties mainly in the Permian Basin of southeast New Mexico and west Texas – has been on a bull run: it went past estimates in all the last four quarters, resulting in an average positive surprise of 247.57%.
Powered with the right combination of two key ingredients – an Earnings ESP of +2.33% and Zacks Rank #3 – our proven model shows that an earnings beat is likely for Concho Resources in the to-be-reported quarter as well.
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