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Over the last three years, the energy market has experienced intense price volatility. However, it seems that following an extended period of relative weakness, energy stocks are finally on their way to recovery. With crude now back over $50 and natural gas revolving around the pivot point of $3, the panic that swept over the market are all but gone. The incredible turnaround has stoked high expectations from the energy sector going into the penultimate quarter of 2017.

Let's take a look at how oil and gas prices behaved during the third quarter of this year and what makes the Energy sector a material factor this earnings season.

Q3 Report Card: Prices End on a Positive Note

Oil: The U.S. oil benchmark wrapped up a strong quarter amid continued declines in domestic inventories and an improving supply-demand narrative.

The rapid decline of oil inventories in recent months has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. Moreover, energy bodies OPEC and IEA both recently raised global oil demand forecasts for this year. Also, supply from the 14-member OPEC cartel is set to remain constraint for at least the next six months, helping to tighten the market significantly. Adding to the positive momentum, OPEC and Russia claimed to be on the right track in clearing the global oil glut with half the job done.

With fundamentals pointing to a tighter market, oil ended the third quarter at $51.67 per barrel, up about 10.5% sequentially. A year ago, crude futures hovered around the $45 per barrel mark.

Natural Gas: Natural gas fared badly, dropping about 3.5% in the July-September period, thanks to the fuel’s tepid demand on the back of mild weather conditions and hurricane-related power outages.

Despite the sequential fall, natural gas prices are in a sweet spot compared to the corresponding period of 2016. The commodity futures ended the quarter at $3 per MMBtu, up more than 3% from the Sep 30, 2016 settlement of $2.9 per MMBtu.

Energy Companies to Gain from Higher Prices: All oil/gas-related stocks stand to benefit from recovering commodity prices as they will be able to extract more value for their products.

Year-over-Year Gain Leads to Bullish Expectations

A look back at the Q2 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 April-June period turned out to be a rather good one with earnings for the sector recording a massive 252.7% jump from the same period last year – the most among all 16 broad Zacks sectors by a long way – on 16.8% higher revenues.

The picture looks rather encouraging for the upcoming Q3 earnings season as well. This is not surprising, considering that oil and gas both improved from the year-ago period. In fact, the strongest growth in Q3 is again set to come from the Energy sector. As per our Earnings Preview report, earnings for the sector are expected to be up 122.4% from the third quarter of 2016, while the top-line is likely to show an impressive growth of 17.9%.

How to Identify the Outperformers?

The encouraging figures suggest that there are a number of companies likely to beat our third quarter earnings estimates.

Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.

But with a wide range of energy firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.

While it is impossible to be sure about such outperformers, our proprietary methodology - Earnings ESP - makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

5 Stocks to Invest In

Gulfport Energy Corporation (GPOR - Free Report) : Headquartered in Oklahoma City, OK, Gulfport Energy is an independent oil and natural gas exploration and production company with primary focus on the Utica Shale in Eastern Ohio and the SCOOP Play in Oklahoma.

The company has beaten the Zacks consensus earnings estimate for the last four consecutive quarters with an average positive earnings surprise of 57.92%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +6.08% and a Zacks Rank of 1 – our proven model shows that an earnings beat is expected for Gulfport Energy in the to-be-reported quarter as well.

The company is expected to report third-quarter 2017 results on Nov 1.

Concho Resources Inc. (CXO - Free Report) : Concho Resources, based in Midland, TX, is an independent energy exploration and production company with producing properties mainly in the Permian Basin of southeast New Mexico and west Texas.

The oil and gas finder has been on an excellent run: beating their earnings estimates in each of the last four quarters.

And, with an Earnings ESP of +11.53% and a Zacks Rank #2, an earnings beat is possible for Concho Resources in the upcoming quarterly release too.

The company is expected to report third-quarter 2017 results on Oct 31.

National Oilwell Varco Inc. (NOV - Free Report) : National Oilwell Varco formerly National Oilwell, is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, and equipment used in oil and gas drilling and production worldwide.

Coming to the earnings surprise history, this Houston, TX-headquartered energy equipment maker has been on a mixed run: it went past estimates in two of the last four quarters.

But our model indicates that National Oilwell Varco is likely to beat on earnings this time around, as it has a Zacks Rank of 2 and an Earnings ESP of +10.91%.

The company is expected to report third-quarter 2017 results on Oct 26.

Suncor Energy Inc. (SU - Free Report) : Calgary, Alberta-based Suncor is Canada’s premier integrated energy company. Suncor's operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.

The company has a good track of having outperformed estimates in three of the last four quarters.

Suncor is likely to beat estimates in the to-be-reported quarter as well. This is because the company is Zacks Ranked #2 with an Earnings ESP of +29.60%.

The company is expected to report third-quarter 2017 results on Oct 25.

Halliburton Company (HAL - Free Report) : Houston, TX-based Halliburton is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance, and engineering and construction services to the energy, industrial, and government sectors.

It has a 100% track of outperforming estimates over the last four quarters with an average positive earnings surprise 67.17%.

Powered with the right combination of the two key ingredients – an Earnings ESP of +0.17% and a Zacks Rank of #3 – our proven model shows that an earnings beat is expected for Halliburton in the to-be-reported quarter as well.

The company is expected to report third-quarter 2017 results on Oct 23.

Bottom Line

Riding on the recovery in oil and gas prices, there are certain energy companies that are primed to outperform the Zacks Consensus Estimate. They certainly hold the potential to make investors standout gains.

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