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4 Energy Stocks Investors Should Avoid Ahead of Earnings

Nilanjan Choudhury

With a market-thumping 24% return, 'Energy' was the top performing S&P sector in 2016. The incredible gains of last year stoked high expectations going into 2017.

Let's take a look at how oil and gas prices behaved during the first three months of this year.

Q1 Report Card: Prices Move Lower but Recover from Year-Ago Lows

Despite hope offered by the biggest oil deal in a decade and a new pro-fossil fuel administration in the White House, crude prices logged a loss of almost 6% for the first quarter as traders focused on the rising flood of U.S. shale-driven production. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more.

With the recent uptick in U.S. shale production putting more pressure onto the market, oil ended the first quarter at $50.60 per barrel, 5.8% lower than year-end 2016 prices.

Natural gas fared worse, dropping more than 14% in the Jan-Mar period, thanks to one of the mildest winters on record. A warmer winter translated into tepid requirement for the heating fuel and upended demand forecasts.

Despite the sequential fall, both oil and natural gas prices are in a sweet spot compared to the corresponding period of 2016. While crude slumped to a 12-year low, natural gas futures dropped to its worst level in almost 17 years.

Year-Over-Year Gains Leads to Bullish Expectations

Ending the dismal trend from the past few quarters, a look back at the Q4 earnings season reflects that the overall results of the Oil/Energy sector finally turned the corner, driving the aggregate growth picture for the S&P 500 index.

The Oct-Dec 2016 period turned out to be a rather good one with the OPEC deal and extreme weather conditions engineering a hefty rise in oil and gas prices during the fourth quarter.

A historic OPEC production cut agreement, together with help from non-OPEC producers saw oil prices end the year at $53.72 a barrel, representing a gain of 11.4% sequentially and 45% for the year. Meanwhile, natural gas embarked on its own upward journey, with futures jumping around 25% just in the fourth quarter. Ending the year at $3.724 per million Btu (MMBtu) – up 59% from 2015 – the heating fuel was buoyed by a cold snap that translated into strong demand.

As a result, following 8 back-to-back quarters of earnings declines, analysts said that the sector was likely to get better in the fourth quarter and clock its first positive earnings growth after 2 years. With estimate revisions going up following OPEC’s Algeria grandstand, the Oil/Energy sector’s earnings were expected to improve 8.8% from the fourth quarter 2015 levels.

True to the predictions, the sector came out swinging. For the sector components on the S&P 500 index, total Q4 earnings were up 18.1% on 2.0% higher revenues.

The picture looks rather encouraging for the upcoming Q1 earnings season as well. This is not surprising, considering that oil and gas both fell to multi-year lows in the year-ago period. In fact, the 'Energy' sector is set to turn around from a modest loss in the year-earlier period to improving positive earnings this quarter.

Importantly, as per our Earnings Preview report, the aggregate dollar amount of earnings increase for the Energy sector is the highest of all 16 Zacks sectors, with Energy expected to earn a total of $8.1 billion in Q1 as against a loss -1.6 billion in the year-earlier quarter. The top-line is likely to show an impressive growth of 32.6% from the first quarter 2016 levels.

Not all Stocks Will Outperform Estimates

Sure, investing in companies that positively surprises estimates can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.

But, the flip side, not all energy companies will deliver positive earnings surprises despite the promising backdrop. And when a stock negatively surprises and its stock plummets subsequently, it can destroy a trade, set back an entire portfolio, and make a trader lose his confidence. Few things can decimate a stock like a negative earnings surprise.

Utilizing Zacks' Earnings ESP system can greatly increase your odds of finding these potential underperformers before they report. And excluding these stocks from one’s portfolio can actually increase return by minimizing losses. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Apart from Earnings ESP, we have relied on our proprietary Zack Rank and Style Score systems to help you avoid a few oil and gas companies this earnings season. Our research shows that stocks with a Zacks Rank of #4 (Sell) or 5 (Strong Sell) along with a VGM score of ‘D’ or lower are best avoided. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

4 Energy Stocks to Steer Clear Of This Earnings Season

Dril-Quip Inc. DRQ: Houston, TX-based Dril-Quip manufactures highly engineered offshore drilling and production equipment for deepwater severe-service applications and harsh environmental conditions.

Zacks Rank #4

Earnings ESP: -466.67%

VGM Score: D

Expected Earnings Release Date: Apr 25

PetroQuest Energy Inc. PQ: PetroQuest Energy, headquartered in Lafayette, LA, is an upstream energy company that explores for and produces oil and natural gas in East Texas, South Louisiana, and shallow waters of the GOM shelf.

Zacks Rank #4

Earnings ESP: -32%

VGM Score: D

Expected Earnings Release Date: May 1

Schlumberger Ltd. SLB: Houston, TX-based Schlumberger is a leading oilfield services company, providing technology, project management and information services to the global oil and gas industry.

Zacks Rank #4

Earnings ESP: -3.85%

VGM Score: F

Expected Earnings Release Date: Apr 21

Tesoro logistics L.P. TLLP: Based in San Antonio, TX, Tesoro Logistics is an energy partnership that owns crude oil, refined products and natural gas pipelines.

Zacks Rank #4

Earnings ESP: -23.88%

VGM Score: D

Expected Earnings Release Date: May 8

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Tesoro Logistics LP (TLLP): Free Stock Analysis Report
 
Dril-Quip, Inc. (DRQ): Free Stock Analysis Report
 
Schlumberger N.V. (SLB): Free Stock Analysis Report
 
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