Over the last three years, the energy market has experienced intense price volatility. However, it seems that following an extended period of relative weakness, energy stocks are finally on their way to recovery. With crude now back over $60, the panic that swept over the market is all but gone. The incredible turnaround has stoked high expectations from the energy sector going into the final quarter of 2017.
Let’s take a look at how oil prices behaved during the fourth quarter of 2017 and what makes the Energy sector a material factor this earnings season.
Q4 Report Card: Oil Prices End on a Positive Note
The U.S. oil benchmark wrapped up 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. The gradual fall has 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.
Another reason why the U.S. oil benchmark soared nearly 17% last quarter revolved around expectations that OPEC and other major producers will agree to expand their output-cut deal beyond March. True to 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 since June 2015. A year ago, crude futures hovered around the $53 per barrel mark.
All oil-related stocks stand to benefit from recovering commodity prices as they will be able to extract more value for their products.
Year-over-Year Gain Leads to Bullish Expectations
A look back at the Q3 earnings season reflects that the overall results of the Oil/Energy sector were spectacular, driving the aggregate growth picture for the S&P 500 index. The July-September period turned out to be a rather good one with earnings for the sector recording a massive 152.3% jump from the same period last year – the most among all 16 broad Zacks sectors by a long way – on 19.3% higher revenues.
The picture looks rather encouraging for the upcoming Q4 earnings season as well. This is not surprising, considering that oil prices improved considerably from the year-ago period. In fact, the strongest growth in Q4 is again set to come from the Energy sector. As per our Earnings Preview report, earnings for the sector are expected to be up 178.5% from the fourth quarter of 2016, while the top-line is likely to show an impressive growth of 24.1%.
How to Identify the Outperformers?
The encouraging figures suggest that there are a number of companies likely to beat our fourth quarter earnings estimates.
Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.
But 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 could 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). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
5 Stocks to Invest In
Pioneer Natural Resources (NYSE: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 went past estimates in each of the last four quarters.
And, with an Earnings ESP of +2.45% and a Zacks Rank #1, an earnings beat is possible for Pioneer Natural Resources in the upcoming quarterly release too.
The company is expected to report fourth-quarter 2017 results on Feb 6.
Propetro Holding Corp (NYSE:PUMP): Founded in 2005, ProPetro Holding is an oilfield services company that primarily offers hydraulic fracturing to major oil and gas operators.
Coming to the earnings surprise history, this Midland, TX-headquartered specialized service provider has been on a mixed run: it went past estimates in two of the last four quarters.
But our model indicates that ProPetro is likely to beat on earnings this time around, as it has a Zacks Rank of 2 and an Earnings ESP of +13.39%.
The company is expected to report fourth-quarter 2017 results on Feb 7.
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 good track of having outperformed estimates in two of the last three quarters.
C&J is likely to beat estimates in the to-be-reported quarter as well. This is because the company is Zacks #2 Ranked that has an Earnings ESP of +4.01%.
The company is expected to report fourth-quarter 2017 results on Feb 8.
RPC, Inc. (NYSE:RES): Based in Atlanta, GA, RPC provides a broad range of specialized services – including pressure pumping and coiled tubing – to independent oil and gas explorers throughout the U.S.
It has a 75% track of outperforming estimates over the last four quarters at an average rate of 49.82%.
Powered with the right combination of the two key ingredients – an Earnings ESP of +1.21% and a Zacks Rank of 2 – our proven model shows that an earnings beat is expected for RPC in the to-be-reported quarter as well.
The company is expected to report fourth-quarter 2017 results on Jan 24.
Halliburton Company (NYSE:HAL): Halliburton is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance, and engineering and construction services to the energy sector.
It has a 100% track of outperforming estimates over the last four quarters at an average rate of 41.23%.
Powered with the right combination of the two key ingredients – an Earnings ESP of +0.46% and a Zacks Rank of 3 – our proven model shows that an earnings beat is expected for Halliburton in the to-be-reported quarter as well.
The Houston, TX-based company is expected to report fourth-quarter 2017 results on Jan 22.
Riding on the recovery in oil prices, there are certain energy companies that are primed to outperform the Zacks Consensus Estimate. They certainly hold the potential to make investors standout gains.
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