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Get Ready For a Fourth-Quarter Sale on Energy Stocks

Q3 a reflection of energy's challenges, potential

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Capping off the quarter was another forward-looking purchase from Exxon Mobil (NYSE:XOM). In its largest deal since buying XTO back in 2010, the energy major agreed to buy nearly 196,000 acres from Denbury Resources (NYSE:DNR) in North oil-rich Bakken shale. The deal, valued at $2 billion, will go a long way to help boost the world’s largest publicly traded energy company’s output of crude oil.

While it remains to be seen just how successful all of these deals will be, one thing is for certain — their sheer number and size are increasing.

Downstream Surges Forward

We’ve written about the harsh reality that has been the downstream or refining sector before here at InvestorPlace. The refining sector looked pretty grim earlier this year when higher crude oil prices put severe pressures on the refiners’ margins. Well, for the past few quarters — and continuing into the third — things have gotten pretty good for refiners and marketers of crude oil products.

Refiners are realizing a huge boost to their bottom lines not only from lower crude oil prices, but from exporting record amounts of gasoline. For the first time since 1949, the U.S. exported more gasoline, heating oil and diesel fuel than it imported.

Basically, U.S. refiners are using their low-cost advantage over foreign downstream operators to export record amounts of gasoline and profit from the spread. That advantage is leading to rising earnings from firms like Valero (NYSE:VLO), Tesoro (NYSE:TSO) and HollyFrontier (NYSE:HFC), and could signal the start of a new golden age for the refining sector.

A Positive Outlook for the Fourth Quarter

Looking forward, things might be picking up for the energy sector. While average prices for crude oil and natural gas were at lows throughout Q3, already we’ve seen some increases across the board. Crude has surged roughly 20% to reach $93 a barrel since its nine-month low in June. Likewise, natural gas has risen 60% since hitting a 10-year low back in April.

All in all, analysts estimate that these rising prices should help producers see a slight increase in profits for the fourth quarter, then an 8.8% profit gain in 2013.

Additionally, lower prices in the third quarter could (and should) signal lower capital spending budgets and force drilling activity levels lower — something we’ve already seen occurring in the natural gas space. That’ll help boost prices even more for the next couple of quarters to the so-called “sweet spot,” where producers still make money without crippling demand.

For investors, all of this means it finally could be time to buy the energy sector as the earnings reports roll in. Remember, these reports deal with lower third-quarter issues — not the current pricing environment we are in. Odds are shares of the E&P firms will drop on the “bad” news, resulting in plenty of bargains.

By and large, it just goes to show how looking back can lead to future opportunities.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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