After having witnessed extreme volatility in terms of pricing over the last three years, the commodity market has gradually recovered from its historic lows, to comfortably trade at more than $60 a barrel since the start of this year.
In fact, the first quarter of the year saw the U.S. oil benchmark attain its highest settlement since December 2014 despite record high domestic production. Crude was supported by various catalysts, including strong demand and continued production curb from OPEC and its allies. Needless to say, such favorable developments have buoyed investors’ optimism surrounding the sector’s first-quarter results.
Q1 Progress Report: What’s Going in Favor?
Per EIA data, the commodity rose about 7.5% in the first three months of 2018 to finish the quarter at $64.87 per barrel. It goes without saying that all oil-related stocks are thus poised to benefit from recovering commodity prices as they will be able to extract more value for their products.
One of the main reasons why the U.S. oil benchmark soared revolved around expectations that OPEC and other major producers agreed to expand their output-cut deal beyond March. The coalition prolonged the agreement for another nine months to the end of 2018 in an attempt to clear the supply gut.
Another major factor fueling higher oil prices is fast-growing demand for the commodity, which continues to tighten the market. Per the International Energy Agency (IEA), global oil demand is likely to grow by 1.5 million barrels a day this year to average 99.3 million barrels a day.
Sharp inventory drawdowns have also led to the commodity tread on growth trajectory. Oil stockpiles have shrunk in 36 of the last 51 weeks and are down more than 100 million barrels since April last year. The gradual fall – stemming from a combination of lower imports and spiraling exports – has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 429.9 million barrels, current crude supplies are 20% below the year-ago period.
While there is renewed optimism among U.S. oil companies amid the $65-plus WTI prices, the positivism could be undermined by soaring U.S. production. Volume from U.S. oil fields (inclusive of shale) has risen 25% since mid-2016 to more than 10.5 million barrels per day — the highest since the EIA started maintaining weekly data in 1983. In early February, oil production broke through the 10-million-barrels-a-day threshold for the first time in nearly 50 years and has maintained the record levels thereafter.
A rise in the oil drilling rig count points to a further increase in domestic output. An early gauge of future activity, rigs drilling for oil in America totaled 1,003 in the week to Apr 6, as per the latest weekly report by Baker Hughes, a GE Company.
Nevertheless, while we do not rule out chances for short-term pullbacks on oversupply concerns, we remain extremely confident of an extended period of gains in the near future.
The Picture So Far
With the Q1 earnings season finally kicking off, 24 S&P 500 participants released their financial numbers as of Apr 11. Per the latest Earnings Trends, the results reflect a positive trend, with an above-average proportion of companies beating top- and bottom-line expectations. Overall earnings, for the companies that have already reported, are up 39.3% from the year-ago period on 11.7% higher revenues. The beat ratio for the bottom line was 75% while that for the top line was 70.8%.
The strong momentum we saw in the preceding earnings season is expected to continue in this reporting cycle, with total earnings for the S&P 500 index expected to be up 16 % from the same period last year on 7.4% higher revenues. This would follow 13.4% earnings growth on 8.6% revenue growth in the 2017 Q4 earnings season, the best quarterly performance in more than six years.
Encouraging Numbers From Energy Space
The Oil/Energy sector put up a stellar show in the October-December 2017 period. Earnings for the sector recorded a massive 136.3% jump from the year-ago period — the highest among the 16 broad Zacks sectors — on 23.6% higher revenues.
The Q1 earnings season for the Energy sector is just around the corner. Investors are eagerly awaiting the flow of results, starting Apr 20, when Schlumberger Limited (SLB) reports first and foremost from the S&P energy cohort.
In fact, the Energy sector is poised to witness the highest growth in Q1 yet again. The Earnings Trends report shows that earnings for the sector are expected to be up 60.1% from the year-ago quarter, while the top line is likely to register 16.1% growth.
Picking the Prospective Winners for the Season
The encouraging figures suggest that there are a number of companies which are likely to trump first-quarter estimates.
However, 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 can 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 stocks here.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Bet on These 5 Stocks for Higher Returns
Royal Dutch Shell plc (RDS.A - Free Report) : Headquartered in Netherlands, Shell is one of the largest integrated energy companies engaged in the production, refining, distribution, and marketing of oil and natural gas.
The super major has been on an excellent run; it breezed past estimates in each of the last four quarters.
With an Earnings ESP of +5.26% and a Zacks Rank #3, the company is likely to deliver a beat this earnings season as well.
The company is anticipated to unveil its results on Apr 26.
ConocoPhillips (COP - Free Report) : Headquartered in Houston, TX, ConocoPhillips is among the leading upstream energy players in the world.
The company topped the earnings estimates in three out of four trailing quarters, with an average beat of 144.45%.
With an Earnings ESP of +3.33% and a Zacks Rank #3, the company is likely to deliver a beat this earnings season as well.
The company is expected to release its results on Apr 26.
Helmerich & Payne Inc. (HP - Free Report) : Headquartered in Oklahoma, Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere with the youngest but the most efficient drilling fleet.
Helmerich & Payne topped estimates in three of the last four quarters, with an average beat of 37.06%.
The company is powered by the right combination of the two key ingredients to deliver an earnings beat this quarter as well. Helmerich & Payne has an Earnings ESP of +2.94% and a Zacks Rank #3.
The company is anticipated to report on Apr 26.
Continental Resources, Inc. (CLR - Free Report) : Headquartered in Oklahoma, Continental Resources is an independent oil and gas explorer with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States.
The company delivered an average positive earnings surprise of 64.93% in the trailing four quarters.
Our model indicates that Continental Resources is likely to top on earnings this season, as it has a Zacks Rank #1 and an Earnings ESP of +7.50%.
The company is slated to report its results on May 2.
Murphy Oil Corporation (MUR - Free Report) : Based in Arkansas, Murphy Oil is an independent producer whose exploration activities are mainly concentrated on Deepwater Gulf of Mexico, the Atlantic Margin, Southeast Asia and Australia.
The company topped the earnings estimates in three out of four trailing quarters, with an average beat of 96.31%.
Murphy Oil is likely to come up a beat this earnings season with an Earnings ESP of +27.40% and a Zacks Rank #2.
The company is slated to unveil its results on May 2.
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