West Texas Intermediate (or WTI) — a benchmark for oil prices in the United States — recently hit four year high. The commodity popped above $76 a barrel, meaning that WTI oil surged almost 200% from the dark days of February 2016, when it fell to a 13-year low of around $26 per barrel.
Upstream Oil Companies Best Positioned to Benefit from the Oil Rally
While all crude-focused stocks stand to gain from the oil rally, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products. In particular, the domestic E&P companies — with their dominant exposure to WTI pricing — are primed for upward pressure on both revenues and earnings.
Throughout the downturn, energy producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service producers. Moreover, driven by operational efficiencies, these entities have been able to reduce unit costs and live within their cash flows.
Prices Should Remain Strong Over the Next Few Months
EIA’s October Short-Term Energy Outlook forecasts WTI to average $73.05 during the fourth quarter, not far from the commodity’s recent highs.
Supply-side shocks out of Iran, Venezuela and Libya in the face of growing global consumption levels — especially in emerging markets such as China and India — have put the oil market in a fundamentally tight spot. This robust backdrop, which is expected to strengthen over the course of this year, has breathed life back into the sector.
The gradual uptick in crude prices along with efficient strides adopted by the companies during the slump are now encouraging producers to rev up development. As a result, most domestic upstream players have had a strong 2018 so far, exceeding their production targets through a combination of a high level of operational execution, lower completion cycle times and impressive cost reductions.
Importantly, expectations for stabilized oil prices for some time into the future provides investors with an excellent chance to accumulate some quality E&P names – more so the ones with strong earnings outlook.
Growing Optimism is Driving Estimates Higher
Perhaps unsurprisingly, a number of the E&P companies are seeing solid activity on the earnings estimate revision front. These positive earnings estimate revisions suggest that analysts are becoming more optimistic on the industry’s earnings for the coming quarter. In fact, consensus estimates have moved higher for the period over the past four weeks, suggesting that the firms could be solid choices for investors.
To guide investors to the right picks, we highlight four stocks that carry a Zacks Rank of #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Buy These Four E&P Stocks
Hess Corporation HES, a global explorer and producer of oil and natural gas, has a Zacks Rank #2. The company’s domestic operations are concentrated in the Bakken, Utica, and deepwater Gulf of Mexico. In the last 30 days, two earnings estimates moved north, while one moved south for the third quarter. The Zacks Consensus Estimate for earnings has risen 7.7% in the same period.
Northern Oil & Gas, Inc. NOG is a non-operator explorer and producer with primary focus on the Williston Basin in North Dakota and Montana. It also carries a Zacks Rank of 2. In the last 30 days, four earnings estimates moved north, while none moved south for the third quarter. The Zacks Consensus Estimate for earnings has risen 20% in the same period.
California Resources Corporation CRC is an oil and natural gas explorer with operations focused exclusively in the state. The company has a Zacks Rank #2. In the last 30 days, two earnings estimates moved north, while none moved south for the third quarter. The Zacks Consensus Estimate for earnings has risen 56.3% in the same period.
Whiting Petroleum Corporation WLL is a top-tier upstream operator in North Dakota's Williston Basin. The company has a Zacks Rank #2. In the last 30 days, three earnings estimates moved north, while two moved south for the third quarter. The Zacks Consensus Estimate for earnings has risen 1.7% in the same period.
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