Markets are more than halfway through the Q4 earnings season, with 66.4% S&P 500 members having reported results as of Friday, Feb 8.
Energy Earnings Soar
The Oil/Energy sector has been off to a spectacular start. For the 45.2% sector components on the S&P 500 Index that have reported Q4 results, total earnings surged 110.1% on 12.3% higher revenues. While 64.3% of the companies have been successful in beating earnings estimates, 57.1% outperformed the top line.
Let's take a look at how oil and natural gas prices behaved during the fourth quarter of 2018 and what makes the Energy sector a material factor this earnings season.
Q4 Report Card: Volatile Oil, Gas Prices
A steady increase in the price of U.S. oil over the last two years culminated in the benchmark popping above $76 per barrel in early October, the highest level in nearly four years. Supply-side shocks out of Iran, Venezuela and Libya in the face of growing global consumption levels — especially in emerging markets such as China and India — put the oil market in a fundamentally tight spot.
Then, in a stunning reversal, oil faced a two-pronged attack: rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Oil’s troubles helped send the index into a tailspin, leading to a 40% drop from October highs. The fourth quarter saw oil benchmark in the United States plunge to a 17-month low of $42.53 a barrel on Christmas Eve. To be precise, the commodity finished December at $45.41 per barrel. A year ago, crude futures hovered around the $60 per barrel mark.
According to the US Energy Information Administration, or EIA, the plethora of jumps and drops meant that WTI prices eked out handsome year-over-year gain in October and a loss in December, while average monthly prices in November were essentially flat compared to a year ago.
Meanwhile, natural gas rose to a four-year high of $4.929 per MMBtu in mid-November. The early onset of winter, together with the lowest level of stocks in 15 years and demand from power plants and growing LNG shipments lifted the commodity to its highest level since November 2014. The fuel ended the quarter at $2.94 per MMBtu – essentially where it was a year ago.
However, as the EIA figures point out, natural gas futures in October, November and December rose 10%, 34% and 41%, respectively, from their respective year-ago averages.
Average Monthly Price Gains Leads to Bullish Expectations
A look back at the Q3 earnings season reflects that the overall results of the Energy sector were spectacular, driving the aggregate growth picture for the S&P 500 index. The July-September period turned out to be a rather good one with earnings for the sector recording a massive 106% jump from the same period last year – by far the most among all 16 broad Zacks sectors by a long way – on 21.2% higher revenues.
The picture looks rather encouraging for the Q4 earnings season as well and are validated by the sector’s healthy earnings picture so far in the quarter. A relatively solid backdrop is likely to aid the sector components. Consequently, the fourth-quarter numbers should be good on the corporate earnings front.
Per the latest Earnings Preview report, the energy sector is poised to record the highest growth among all sectors in the fourth quarter. Per our expectations, the sector’s earnings are expected to grow 100.3% from fourth-quarter 2017 and the top line is likely to improve 14.4% from the year-ago level.
How to Identify the Outperformers?
The encouraging figures suggest that there are a number of companies likely to beat our fourth 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%.
Concho Resources Inc. (CXO - Free Report) is an independent energy explorer with producing properties mainly in the Permian Basin of southeast New Mexico and west Texas. It is based in Midland, TX. The company delivered a positive earnings surprise of 25.7% in the last reported quarter. Concho Resources has an earnings ESP of +1.07% and a Zacks Rank #3. The company is slated to release its final-quarter results on Feb 19.
TransCanada Corporation (TRP - Free Report) is a premier energy infrastructure provider in North America, primarily focused on natural gas transmission in Canada, the United States, and Mexico. It is based in Calgary, Alberta. The company delivered a positive earnings surprise of 28.8% in the last reported quarter. TransCanada has an earnings ESP of +1.56% and a Zacks Rank #3. The company’s fourth-quarter earnings release is due on Feb 14.
The Williams Companies, Inc. (WMB - Free Report) is one of the largest domestic transporters of natural gas by volume. It is based in Tulsa, OK. The company delivered a positive earnings surprise of 33.3% in the last reported quarter. Williams has an earnings ESP of +11.63% and a Zacks Rank #3. The company is slated to release its final-quarter results on Feb 13.
ProPetro Holding Corp. (PUMP - Free Report) is an oilfield services company that primarily offers hydraulic fracturing to major oil and gas operators. It is based in Midland, TX. The Zacks Consensus Estimate for fourth-quarter earnings has been revised 8.5% upward in the last 30 days. ProPetro has an earnings ESP of +27.52% and a Zacks Rank #3. The company’s fourth-quarter earnings release is due on Feb 26.
Whiting Petroleum Corporation (WLL - Free Report) is an independent oil and gas exploration and production company whose asset base is concentrated in the Williston Basin of North Dakota and the Niobrara play in Colorado. It is based in Denver, CO. The company delivered a positive earnings surprise of 58.6% in the last reported quarter. Whiting Petroleum has an earnings ESP of +4.38% and a Zacks Rank #3. The company is slated to release its final-quarter results on Feb 26.
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