After having witnessed extreme volatility in terms of pricing over the past three years, the commodity market has gradually recovered from hitting its historic lows to comfortably trade at close to $70 a barrel since the past couple of months.
The oil benchmark in the United States attained its highest settlement since November 2014 in the second quarter despite a record-high domestic production. Crude was supported by a variety of catalysts including a series of buoyant weekly EIA crude inventory numbers, worries about tightening global supplies amid strong demand and doubts regarding OPEC’s ability to boost production. Needless to say that such favorable developments have buoyed investors’ optimism around the sector’s impending second-quarter results.
Q2 Progress Report: Energy Treads on Growth Trajectory
Average West Texas Intermediate (WTI) crude prices for the month of April, May and June 2018 were recorded at $66.25, $69.98 and $67.87 per barrel, respectively, per data from the U.S. Energy Information Administration (EIA). These average prices were considerably higher than the year-ago respective prices of $51.06, $48.48 and $45.18. Various factors have been responsible for the crude oil stocks’ bullish run.
A major factor fueling oil price rise is its fast-growing demand in the market, which continues to tighten the same. The International Energy Agency (IEA) in its closely watched monthly oil-market report said that global demand for this powerful commodity is likely to grow by 1.4 million barrels a day this year as well as in 2019.
Oil prices have also been backed by OPEC’s recent plans for a smaller-than-expected output raise.
Sharp inventory drawdowns have also resulted in the crude price rally. Oil stockpiles have shrunk in 44 of the last 64 weeks and were down more than 90 million barrels in the past year. The gradual fall — stemming from a combination of lower imports and spiraling exports — has helped the U.S. crude market shift from a year-over-year storage surplus to a deficit.
Oil prices have also spiked amid receding Venezuela output and U.S.-Iran tensions.
Meanwhile, since the crude oil and refined product prices don’t always move in lockstep, the crack differentials are also widening, leading to margin expansion and higher refining capacity rate for the refiners. Hence, the refiners are also reaping benefits of escalated demand for their products.
It goes without saying that most oil-related stocks are thus poised to gain traction from recovering commodity prices and a conducive refining environment.
A General Picture So Far
The earnings season is past its pinnacle with results from more than 80% of S&P 500 members already on board.
Per the latest Earnings Preview dated Aug 2, the released financial numbers reflect a positive trend with an above average proportion of companies beating top- and bottom-line expectations. Overall, earnings for the companies having been reported so far, are up 25% from the year-ago period on 10.5% higher revenues. The beat ratio for the bottom line was 80.1% while the same for the top line was 73.8%.
Total earnings for the S&P 500 are expected to be up 23.9% from the comparable quarter last year on 9.3% stronger revenues. Moreover, 14 of the 16 Zacks sectors are likely to register double-digit earnings growth.
Shining Prospects of the Energy Sector
Looking back at the Q1 earnings season, the sector’s earnings surged 79.6% from the year-ago quarter’s tally — which is by far the best ever growth achieved among all sectors — on 14.5% robust revenues.
In the second quarter again, the energy sector is set to record the maximum growth among all sectors. In fact, this is the only sector among all the 16 Zacks sectors, which is projected to witness triple-digit earnings growth. Per our estimates, the sector’s earnings are anticipated to skyrocket 123.3% from the figure registered in second-quarter 2017 while the top line might improve 22.4% from the year-ago level.
Of the energy companies having already reported earnings numbers, the total bottom line soared 94.5% on 20.6% higher top line. Most importantly, 52.6% of the energy companies' earnings surpassed estimates while 73.7% of the firms beat on revenue expectations.
Picking Promising Winners for This Earnings Season
The encouraging figures suggest that there are a number of companies, which are likely to trump second-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 choose stocks with potential to deliver better-than-expected earnings this time around.
While it is impossible to be sure about such outperformers, our proprietary methodology - Earnings ESP -makes this routine 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 with significantly high chances of surprising at the next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
You can further taper the list of participants, looking at the stocks carrying 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 possibility of delivering a positive earnings surprise is as high as 70%.
Bet on These 4 Stocks for Garnering Better Returns
Investors can count on is Cheniere Energy Inc. (LNG - Free Report) . This Houston-based energy player is the only LNG exporter in the United States. The stock has a Zacks Rank #2 and an Earnings ESP of +5.25%. Slated to report second-quarter results on Aug 9, the company expects its earnings to witness a year-over-year staggering increase of 225.32% in 2018.
You may also consider Viper Energy Partners LP (VNOM - Free Report) with a Zacks Rank of 3 and an Earnings ESP of +1.21%. This Texas-based midstream partnership’s earnings surpassed estimates in each of the last four quarters, the average beat being 12.45%. The partnership is slated to post its second-quarter numbers on Aug 8.
Semgroup Corporation (SEMG - Free Report) is a Zacks #3 Ranked player and has an Earnings ESP of +100.00%. This company too deserves a place in your portfolio, flaunting a long-term earnings growth rate of 5.10%. This Oklahoma-based entity offering midstream and marketing services is set to unveil second-quarter results on Aug 8.
Another lucrative option is Energy Transfer Partners, L.P. (ETP - Free Report) , a Dallas-based midstream partnership. The firm has a long-term earnings growth rate of 10% and is scheduled to announce second-quarter 2018 results on Aug 8. It has an Earnings ESP of +30.45% and a Zacks Rank #3.
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