Crude supply has been normalizing of late, pushing the price of WTI and Brent to new three-year highs. Prices of oil at the end of the fourth quarter were $60.46 per barrel, up about 19.6% sequentially. Through most of November and the entire December, the commodity traded above the $55-per-barrel psychological mark.
The improving commodity pricing environment is attributed to tailwinds like the OPEC production cuts, which are expected to continue till 2018-end along with improved demand outlook.
On Nov 30, 2017, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord beyond the first quarter of 2018. This was first signed in late 2016. More than 20 oil producers including leading exporters like Russia and Saudi Arabia participated in the meeting. As expected by most analysts, all crude exporters decided to extend the deal through 2018-end. Countries like Saudi Arabia, Russia and their allies have pledged to put 1.8 million barrels a day of crude oil out of the market through this year-end.
Augmenting the positive momentum, OPEC and IEA energy bodies have raised global oil demand forecasts for 2018, thereby helping to tighten the market significantly. The booming crude oil and gas exports this year reflect substantial demand for U.S. oil.
Notably, energy has been the best S&P sector performer in the third quarter of 2017. The momentum is likely to continue in the fourth-quarter as well. In fact, among all the 16 Zacks sectors on the index, energy is the sole sector, expected to witness triple-digit earnings growth in the fourth quarter.
For the final quarter of 2017, we expect energy to post 178.5% earnings growth on 24.1% higher revenues. This anticipated upside in fourth-quarter results is likely to skyrocket above 152.3% recorded in third-quarter 2017.
Reflecting the raised optimism and a positive sentiment built around the stocks, the sector’s leverage ratio has been improving and free cash flow increasing, thereby signaling an overall improvement in its finances.The sector now has sufficient net operating cash flow to fund its capital spending. Also, the energy sector’s 3.7% dividend yield is lucrative and higher than the S&P 500’s 1.8% yield.
Here’s What We Believe
Given the vast size of the sector, it is no mean task to zoom in on the likely outperformers for the fourth quarter. This is where the Zacks Rank, justifying a company’s strong fundamentals, can come in handy. In addition to a favorable Zacks Rank, the stocks have a sound VGM Score. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three scores.
We further streamline our search, focusing on stocks having witnessed more than 10% rise in Q4 earnings estimates over the past four weeks. These northbound estimate revisions suggest that analysts are growing more optimistic on earnings for the coming quarter. Additionally, these stocks have also surpassed the earnings estimates in the last quarter by at least 20% and also carry a positive ESP for the current quarter.
Picking the Right Stocks
First we have QEP Resources, Inc. QEP, headquartered in Denver, CO. The company is an upstream energy player with prime focus on the Permian Basin. The stock has a Zacks Rank #2 (Buy) and a VGM Score of B. It has witnessed an increase of more than 15% in its earnings estimate revisions for the fourth quarter in the last four weeks. This oil and gas explorer reported a positive earnings surprise of 50% in the preceding quarter. The company has an Earnings ESP of +129.2% for the fourth quarter, expected to be reported on Feb 28. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Next in line is Suncor Energy, Inc. SU. Calgary, Alberta-based Suncor is a premier integrated player and is engaged in oil sands development, oil and gas production, petroleum refining and marketing activities. The company has a Zacks Rank of 2 and a VGM Score of B. It has witnessed growth of more than 25% in its earnings estimate revisions for the fourth quarter in the last four weeks. Suncor delivered a positive earnings surprise of 57.7% in the previous quarter. The company has an Earnings ESP of +12.4% and is expected to release fourth-quarter results on Feb 7.
Then we have Crescent Point Energy Corporation CPG in the row. The company is engaged in the acquisition, exploration and development of oil and natural gas properties in Western Canada. This upstream operator is a Zacks #2 Ranked player and has an impressive VGM Score of A. Crescent Point has seen a surge of 60% in its earnings estimate revisions for the fourth quarter in the last four weeks. It came up with a positive earnings surprise of 350% in the last quarter. The company has an Earnings ESP of +33.33% and is expected to announce fourth-quarter results on Feb 22.
Finally there is C&J Energy Services, Inc. CJ to watch out for. Headquartered in Houston, C&J Energy is an oilfield services provider, engaged in on-shore well construction, well completion, well support and other complementary services to the upstream energy companies. This upstream operator is a #2 Ranked player and has a VGM Score of A. The company has witnessed a rise of more than 12.2% in its earnings estimate revisions for the fourth quarter in the trailing four weeks. It pulled off a positive earnings surprise of 142.8% in the past quarter. The company has an Earnings ESP of +4% and is expected to post fourth-quarter earnings performance on Feb 8.
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