Over the last three years, the energy market has witnessed extreme volatility in terms of pricing. However, with crude now trading at over $60 per barrel, it seems that energy stocks are finally on their way to recovery.
Needless to say, such favorable developments have buoyed investors’ optimism surrounding the sector’s fourth-quarter results.
Q4 Progress Report: Energy Treads on Growth Trajectory
The U.S. oil benchmark ended a strong quarter amid continued declines in domestic inventories and an improving supply-demand narrative.
Oil stockpiles have shrunk in 32 of the last 40 weeks and are down almost 114 million barrels since April 2017. The gradual decline helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 419.5 million barrels, current crude supplies are 13.2% below the year-ago period and the lowest since 2015.
The U.S. oil benchmark saw an uptick of nearly 17% last quarter as rounds were made that OPEC and other major producers will likely expand their output-cut deal beyond March, 2018. True to the predictions, the coalition prolonged the current dynamic for another nine months to the end of 2018.
The agreement, now renewed twice, keeps 1.8 million barrels a day (or 2% of global supply) off the market in an attempt to clear a supply glut.
With fundamentals pointing to a tighter market, oil ended 2017 at $60.42 per barrel — the first settlement above $60 mark since June 2015. A year ago, crude futures hovered around the $53 per barrel mark.
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.
A General Review of the Energy Space
The Oil/Energy sector had put up a stellar show in the July-September 2017 period. Earnings for the sector recorded a massive 152.3% jump from the year-ago period — the highest among the 16 broad Zacks sectors — on 19.3% higher revenues.
With 185 S&P 500 participants having released their financial numbers as of Jan 31, we are in the thick of the fourth-quarter earnings season. 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 13.3% from the year-ago period on 8.2% higher revenues. The beat ratio for the bottom line was 82.2% while that for the top line was 80%.
In fact, the Energy sector is poised to witness the highest growth in Q4 yet again. Per the latest Earnings Trends, earnings for the sector are expected to be up 185.1% from the year-ago quarter, while the top line is likely to register 25.2% growth.
Picking the Prospective Winners for the Season
The encouraging figures suggest that there are a number of companies likely which are likely to trump fourth-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).
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
Pioneer Natural Resources Company (PXD): An explorer and producer of oil and natural gas in onshore U.S., this Dallas, TX-headquartered company is focused on the Permian Basin in Texas.
The energy explorer has been on an excellent run; it breezed past estimates in each of the last four quarters.
With an Earnings ESP of +4.07% and a Zacks Rank #1, the company is likely to deliver a beat this earnings season.
The company is expected to report results on Feb 6.
Total SA (NYSE:TOT): Headquartered in France, TOTAL is among the top five integrated supermajors based on production volumes, proved reserves and market capitalization.
Coming to the earnings surprise history, TOTAL has surpassed estimates in three of the trailing four quarters, with an average beat of 3.68%.
Our model indicates that TOTAL is likely to top on earnings this season, as it has a Zacks Rank of 2 and an Earnings ESP of +11.32%.
The company is likely to report results on Feb 8.
NuStar Energy L.P. (NYSE:NS): Based in San Antonio, NuStar is a master limited partnership which is engaged in the transportation and storage of crude oil and other refined products. NuStar is the second-largest independent liquids terminal operator in the United States.
The partnership has a dismal track of earnings surprise history. It lagged earnings estimates in each of the four quarters, with an average miss of 73.12%.
However, things are likely to turn around this quarter as the partnership has the right combination of both the ingredients to deliver an earnings beat. NuStar has an Earnings ESP of +7.46% and a Zacks Rank #3.
The partnership is expected likely to announce results on Feb 8.
Plains All American Pipeline, L.P. (NYSE:PAA): Based in Texas, this master limited partnership deals with the interstate and intrastate transportation, storage and marketing of oil and gas related products.
The partnership missed estimates in the last four quarters, the average being 18.32%.
Nevertheless, the partnership is currently powered with the right combination of two key ingredients — an Earnings ESP of +1.69% and a Zacks Rank of 3 — to help it beat on estimates this quarter.
The company is expected to report results on Feb 6.
C&J Energy Services Inc (NYSE:CJ): C&J Energy Services offers services related to completion and production to the energy industry in North America.
The Houston, TX-based company has a mixed track record. C&J Energy Services topped on estimates in two of the last three quarters, with an average miss of 22.5%.
C&J Energy Services is likely to beat estimates in the to-be-reported quarter as well. This is because the Zacks #2 Ranked company has an Earnings ESP of +8.14%.
The company is likely to report results on Feb 22.
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