We are nearing the end of the fourth-quarter earnings season with results from 358 S&P 500 members on board. For the energy sector, more than half of the companies belonging to the S&P 500 index – including energy majors like ExxonMobil Corporation (XOM), Chevron Corporation (CVX), Royal Dutch Shell plc (RDS.A) and BP plc (BP) – have already reported earnings.
Before picking energy stocks that are expected to beat on fourth-quarter earnings we need to analyze how oil and gas fared during the quarter. This is because these commodities are the main determinants of the fate of almost all energy companies.
Commodity Prices Show Improvement in Q4
The October–December quarter of 2016 was definitely favorable for the energy sector as OPEC agreed to cut output for the first time since 2008 with an aim to recover oil. It is a well-documented fact that oil has been weak for more than two years owing to oversupply amid lackluster demand. Adding to the optimism, oil producers outside the cartel also came forward for the first time in 15 years to strike the historic deal with OPEC and jointly curb production.
Following the historic accord, crude improved through December and traded mostly above the psychological mark of $50 per barrel mark. We note that in December oil pricing environment advanced on both year-over-year and sequential basis.
Natural gas prices also improved substantially from the 17-year lows of around $1.6 per million British thermal units (MMBtu) during first-quarter 2016. In fact, the commodity price touched the psychological mark $3 per MMBtu and traded above this level throughout December, primarily due the forecast of colder temperature. Also, the pricing scenario was much better than the previous year and the prior quarter.
Energy Sector Earnings Growth Turn Positive in Q4
The earnings growth for the energy sector turned positive during the fourth quarter for the first time after eight quarters of decline. For the sector participants enlisted on the S&P 500 Index that reported Q4 results, total earnings grew 11.3% on 2.9% higher revenues.
Irving, TX-based ExxonMobil Corporation – the largest publicly traded oil company in the world – posted better-than-expected fourth-quarter earnings due to improved liquid prices. We believe that ExxonMobil’s result is the main contributor to the positive earnings growth of the energy sector that offset energy major Chevron Corporation’s fourth-quarter earnings miss.
How to Make the Right Pick?
As already mentioned, improvement in commodity prices might drive growth for exploration and production (E&P) companies. This is because E&P companies could sell the commodities at higher prices, in turn generating significant cash flows for the firm’s stockholders.
In such a scenario, selecting energy stocks with good prospects is by no means an easy task. Our proprietary methodology, however, makes it fairly simple. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Our Picks
Frisco, TX-based Comstock Resources Inc. (CRK) is an independent oil and gas exploration and production company engaged in the acquisition, exploration, and development of oil and gas properties.
Over the last 30 days, the Zacks Consensus Estimate (of loss) for the company’s fourth quarter has been narrowed.
The company is scheduled to report fourth-quarter 2016 results before the opening bell on Feb 24. Currently, Comstock has an Earnings ESP of +44.53% and carries a Zacks Rank #3.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Midland, TX, Concho Resources Inc. (CXO) is involved in the E&P operations in the oil and natural gas resources in the U.S.
We note that the company has posted an average positive earnings surprise of 111.67% in the last four quarters.
This Zacks Rank #3 stock has an Earnings ESP of +55.56%. The company is set to report fourth-quarter 2016 results after the closing bell on Feb 21, 2017.
Denver, CO-based QEP Resources Inc. (QEP) is a leading independent energy company engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids.
The company beat the Zacks Consensus Estimate in each of the last four quarters with an average positive earnings surprise of 37.50%.
This Zacks Rank #3 stock has an Earnings ESP of +4.55%. The company is anticipated to report fourth-quarter 2016 results on Feb 23.
Switzerland-based Transocean Ltd. (RIG) is the world’s largest offshore drilling contractor and leading provider of drilling management services.
The driller also managed to surpass the Zacks Consensus Estimate in all the trailing four quarters with an average positive earnings surprise of 543.52% despite unfavorable business scenario.
This stock has a Zacks Rank #3 and an Earnings ESP of +20.00%. The company is set to report fourth-quarter 2016 results on Feb 22, after the closing bell.
Cimarex Energy Co. (XEC), incorporated on Feb 14, 2002, is an independent oil & gas exploration and production firm.
The company reported average positive earnings surprise of 149.21% over the last four quarters.
Cimarex Energy currently carries a Zacks Rank #3 and an Earnings ESP of + 1.72%. The firm is scheduled to report fourth-quarter 2016 results on Feb 15, after the closing bell.
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Transocean Ltd. (RIG): Free Stock Analysis Report
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