We are entering the heart of the Q3 earnings season, with a host of S&P 500 members expected to come out with results by the end of next week.
Picture Emerging Thus Far
We now have Q3 results from 52 S&P 500 members that combined account for 16.7% of the index’s total market capitalization. According to the latest Earnings Trends, total earnings for these companies are up 13.3% from the same period last year on 6.9% higher revenues, with 76.9% positive earnings surprises and 73.1% 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 pretty soon, and events are shaping up quite nicely for their report.
Q3 Report Card: Oil and Gas 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 $45 per barrel.
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: As we know, the profitability of energy companies is directly affected by fluctuations in oil and gas prices. Therefore, 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 2017 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 -- by far the highest growth among all sectors -- on 16.8% higher revenues.
The picture looks rather encouraging for the Q3 earnings season as well. This is not surprising, considering that oil and gas are both averaging higher compared to the third quarter of 2016 when the energy companies reported unusually low bottom line.
In fact, the strongest growth in Q3 is again set to come from the Energy sector. As per our expectations, earnings for the sector are expected to jump 122% from the third quarter of 2016, while the top line is likely to show an improvement of 16.3% from the year-ago levels.
Stocks to Watch for Earnings on Oct 23
Let’s see what’s in store for three energy companies expected to come up with September-quarter numbers on Monday, Oct 23.
First, we have major oilfield service provider Halliburton Company (HAL - Free Report) , which is expected to report before the opening bell.
According to our quantitative model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase its odds of an earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
As it is, we caution against Sell-rated stocks (Zacks Ranks #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
In the previous quarter, Halliburton delivered a positive earnings surprise of 21.1%. Moreover, both Halliburton’s segments, Completion and Production as well as Drilling and Evaluation, reported revenues slightly better than our estimates thanks to improved utilization and pricing gains in North America.
When it comes to earnings surprises, the world's second-largest oilfield services company after Schlumberger Limited (SLB - Free Report) has an incredible history. Investors should note that Halliburton hasn’t missed earnings estimates since mid-2014. And our model indicates that the company is likely to beat on earnings this time around too.
For the quarter to be reported, this Houston, TX-headquartered company has an Earnings ESP of +0.18% and a Zacks Rank of 3, the right combination of the two key ingredients.
Evidently, multiple tailwinds including the recovery in commodity prices have buoyed the entire space. With U.S. activity accelerating and margins set to remain strong, Halliburton’s underlying results are likely to come ahead of our expectations.
As a proof of the resurgence in activities, the Zacks Consensus Estimate for third-quarter Completion and Production revenue is pegged at $3,430 million, much higher than $3,132 million reported in the second quarter of 2017. Sales in the Drilling and Evaluation unit is forecasted to be $1,888 million, more than the prior quarter figure of $1,825.
Our model predicted earnings beat earlier too. When we issued its Q3 earnings preview article, the company had an earnings ESP of +0.18% and carried a Zacks Rank #3.
Headquartered in Amsterdam, Netherlands, Core Laboratories N.V. (CLB - Free Report) is also set to report third-quarter 2017 results, after the closing bell. The company, which provides reservoir management and production enhancement services to the oil and gas industry on a global basis, has a good track of outperforming estimates in the last two quarters.
But our model does not indicate that Core Laboratories is likely to beat on earnings this time around, as it has a Zacks Rank #4 and an Earnings ESP of 0.00%.
We note that the current Zacks Consensus Estimate for the quarter under review is 44 cents, which is 6 cents (or 15.8%) above from the year-ago period. Meanwhile, analysts polled by Zacks expect revenues of $161 million, reflecting a year-over-year increase of 12.6%. However, we notice that the rate of growth may decelerate from the preceding quarter that saw 48.6% jump in the bottom line, while sales were up 10.8%. This could be attributed to the impact of Hurricane Harvey on the company’s Gulf Coast facilities.
Then there is Houston, TX-based Superior Energy Services Inc. (SPN - Free Report) coming up with July-September operational results Monday evening.
As far as earnings surprises are concerned, Superior Energy Services – one of the largest diversified global oilfield service provider, offering drilling, completion and production-related services – has a good history. It went past the Zacks Consensus Estimate thrice in the last four reports.
But our model does not indicate that Superior Energy Services is likely to beat on earnings this time around, as it has a Zacks Rank #3 and an Earnings ESP of -1.14%.
With offshore exploration and drilling demand remaining muted, especially in international markets, the Zacks Consensus Estimate for third-quarter Drilling Products & Services adjusted loss is $14.7 million, wider than the $12.4 million loss expected in the second quarter of 2017.
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