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Oil Stocks to Watch for Q4 Earnings on Jan 31: BHGE, VLO, COP

Zacks Equity Research

The Q4 earnings season is underway, with 136 S&P 500 members having already released their respective quarterly results, as of Jan 29. The companies recorded year-over-year earnings growth of 12.6% on 5.9% higher revenues.

Around 69.1% of the S&P 500 companies surpassed the Zacks Consensus Estimate for earnings, while 60.3% beat revenue estimates.

Energy Sector to Outperform Others

Combining the reported results and the ones to be released henceforth, overall earnings for the S&P 500 Index are estimated to increase 11% year over year on 5.5% higher revenues. It is to be noted that excluding the Energy sector, the Index is expected to report a 9.1% year-over-year earnings growth. In fact, per the latest Earnings Outlook report, Energy will outshine all sectors with earnings growth of 62.7% year over year. This depicts the importance and weightage of the Energy sector in the S&P 500 Index.

Let’s see how the energy market performed during the fourth quarter and which factors are playing a definitive role in the Energy sector.

Deriving Strength From Y/Y Rise in Oil & Gas Prices

In the October-December quarter, the West Texas Intermediate (WTI) crude plunged from a multi-year high of $76.40 a barrel in early October to below $45 in late December, per the U.S. Energy Information Administration (EIA). Delicate demand outlook on fears of global economic slowdown kept energy stocks under pressure. Even the enforcement of sanctions against Iran by the United States last November could not keep oil price from plunging. This was because Washington provided sanction waivers to several big oil-importing countries to continue shipping Iranian crude till mid-2019.

Despite the plunge, the average WTI oil prices in October and November 2018 were recorded at $70.75 and $56.96 per barrel, higher than $51.58 and $56.64 in the respective months of 2017, per EIA. However, the average crude price in December 2018 declined on a year-over-year basis. Although plummeting crude prices during the October-to-December quarter of 2018 should have hurt upstream businesses, a year-over-year uptick in prices in the initial two months might have helped explorers and producers. This, in turn, should help the oilfield services providers as more exploration and production works increase the demand for their services.

Moreover, per EIA, the average natural gas prices for the months of October, November and December of 2018 were reported at $3.28 per Million Btu, $4.09 per Million Btu and $4.04 per Million Btu, higher than $2.88, $3.01 and $2.82 recorded in the respective months of 2017. Hence, the commodity pricing environment was favorable for natural gas producers.

Also, the free fall in oil price through the fourth quarter was a boon for refiners in the short-term perspective as it brought down input prices.

Stocks to Watch

We have chosen three energy players that are gearing up to report fourth-quarter 2018 results on Jan 31.

Headquartered in Houston, TX, Baker Hughes, a GE company BHGE is an oilfield service provider. It has managed to surpass the Zacks Consensus Estimate for earnings in two of the last four quarters, with the average positive surprise being 6.1%.

Baker Hughes, a GE company Price and EPS Surprise

Baker Hughes, a GE company Price and EPS Surprise | Baker Hughes, a GE company Quote

According to our quantitative model, a company should have the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Note that we caution against Sell-rated stocks (Zacks Ranks #4 or 5) going into the earnings announcement, especially when the company is witnessing negative estimate revisions

Our proven model shows that Baker Hughes is likely to beat estimates in the upcoming quarterly results. The company has an Earnings ESP of +0.68% and currently carries a Zacks Rank #3. (Read more: Is a Beat in Store for Baker Hughes in Q4 Earnings?)

San Antonio, TX-based Valero Energy Corporation VLO is a downstream energy company. It surpassed the Zacks Consensus Estimate for earnings in each of the trailing four quarters, with average positive surprise of 6.9%.

Valero Energy Corporation Price and EPS Surprise

Valero Energy Corporation Price and EPS Surprise | Valero Energy Corporation Quote

Our proven model does not indicate earnings beat for Valero Energy in the to-be-reported quarter. This is because the company has an Earnings ESP of -4.19% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

ConocoPhillips COP, headquartered in Houston, TX, is an international oil and gas exploration and production company. It surpassed the Zacks Consensus Estimate for earnings in each of the prior four reported quarters, with average positive surprise of 12.2%.

ConocoPhillips Price and EPS Surprise

ConocoPhillips Price and EPS Surprise | ConocoPhillips Quote

Our proven model shows that ConocoPhillips is unlikely to beat estimates this earnings season as the upstream energy firm carries a Zacks Rank #5 and an Earnings ESP of -0.91%.

Zacks' Top 10 Stocks for 2019

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