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Energy Sector Logs Highest Earnings Growth in Q2: 4 Picks

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The Q2 earnings season has come to a close for all S&P 500 Oil/Energy companies. The sector contributed the most to year-over-year earnings growth for the S&P 500 index.

After thorough research, we can say that the sector is poised to keep churning profits in the coming quarters as well. Hence, it is an ideal time for investors to scoop up more energy stocks.

Oil/Energy Outperforms Other Sectors

We have divided the S&P 500 Index into 16 Zacks Sectors. As per the latest Earnings Outlook, among all the sectors, Oil/Energy has witnessed the highest year-over-year earnings growth. The Oil/Energy companies have recorded 252.7% earnings growth on the back of 16.8% revenue rise. The other sectors significantly lag Oil/Energy. 

Most importantly, the Energy sector alone is responsible for 2.3% year-over-year earnings improvement during second-quarter 2017 for the S&P 500 Index.

What Drove Energy in Q2?

The oil and gas pricing scenario in second-quarter 2017 was substantially better than 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 entire 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.

Natural gas also made a modest recovery in Q2 after the commodity hit its lowest annual average price in 2016 in almost 20 years.  

Energy Will Continue to Generate More Profit

During second quarter of this year, Oil/Energy sector has recorded profits as high as $8.1 billion, which surged from $2.3 billion from the April-to-June quarter of 2016. We are also expecting the sector to earn profits of $9.2 billion, $9.8 billion, $11.8 billion and $13 billion during 3Q17, 4Q17, 1Q18 and 2Q18, respectively.

Also, for full-year 2017, Energy sector will witness earnings of $36.1 billion, which is considerably higher than $9.6 billion during 2016. The upward trend will likely follow in the coming years as reflected that the Energy sector will generate profit of $49.1 billion and $59.3 billion during 2018 and 2019 respectively.

Major shale players in the U.S. – that include Devon Energy Corporation (DVN - Free Report) , Pioneer Natural Resources Company (PXD - Free Report) , Anadarko Petroleum Corporation (APC - Free Report) – have been focusing on lowering capital spending for exploration activities following persistently weak oil and gas prices as compared to mid-2014 level. With lower investment from the U.S. shale companies and constant efforts by the OPEC players to combat low oil, the crude glut problem will likely get resolved in the near future.

Time to Buy Oil/ Energy Stocks

The expectation of improved oil prices is favorable for energy companies. The exploration and production firms will be able to sell the commodities at higher prices in the near future that will again push them to restart producing more crude and natural gas. With higher exploration and production activities, there will be more demand for oil field services companies to efficiently set up oil and gas wells.

Also, increased output level could increase the demand for midstream energy infrastructure assets like pipelines and storage facilities for transporting and storing the commodities.

Our Choices

Picking the prospective energy stocks from the stock universe can be a daunting task. To simplify the task, we have selected stocks using our proprietary stock screener.

We have picked stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy). Moreover, all these stocks have beat the Zacks Consensus Estimate in the last reported quarter.

Based in Fort Worth, TX, Range Resources Corporation (RRC - Free Report) is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S.

The stock’s diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties.

The company currently sports a Zacks Rank #1 and posted a positive earnings surprise of 250.00% for the second quarter. Also, for 2017 and 2018, we are expecting year-over-year earnings growth of 117.7% and 89%, respectively, for Range Resources. You can see the complete list of today’s Zacks #1 Rank stocks here.

Western Gas Equity Partners, LP (WGP - Free Report) – headquartered in The Woodlands, TX – is involved in midstream operations like transporting and storing oil and gas. 

The partnership has a Zacks Rank #1 and has surpassed the Zacks Consensus Estimate during the last reported quarter with a positive earnings surprise of 17.07%. For 2018, we are anticipating almost 25% year-over-year earnings improvement.

Headquartered in Calgary, Canada TransCanada Corporation (TRP - Free Report) is a midstream energy player engaged in transporting natural gas. The company posted a positive earnings surprise of 12.00% for the last reported quarter.

Also, for 2017 and 2018, we are expecting year-over-year earnings growth of 12.5% and 12%, respectively, for TransCanada. The company sports a Zacks Rank #1.

Subsea 7 S.A. (SUBCY - Free Report) , based in Luxembourg, is the provider of subsea field development products and services to the offshore energy players globally. The company sports a Zacks Rank #1.

The company beat the Zacks Consensus Estimate in three of the last four quarters with an average positive earnings surprise of 83.78%. We are also expecting Subsea 7’s earnings to grow almost 5% in 2017.

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