U.S. Markets open in 6 hrs 38 mins

Taper Continues: 3 Oil Stocks to Shine

Zacks Equity Research

Taper Continues: 3 Oil Stocks to Shine
The latest improvement in the U.S. benchmarks, though marginal, from its down phase at the start of this year radiated positivity into investor sentiment. The optimism was reinforced yesterday by the U.S. Federal Reserve’s confirmation of continued taper. The inevitable corollary would be a stronger greenback and softer import costs.
The development is happening at a time when the oil sector is witnessing a drag on earnings growth. Although the majority of firms managed to get over investors’ pessimism in the fourth quarter, the numbers were well short from the year-earlier period.
However, we feel that only a few in the haystack will actually benefit from continued improvement in industry fundamentals. Earlier, a sharp drop in refinery utilization rates due to seasonal maintenance and higher production had resulted in a massive stockpile of crude in the U.S., and a consequent price decline.
The trouble for oil is the fact that its fate is tied to the global economy, which is currently subdued owing to a tepid Europe and slowly building Chinese demand. On the plus side, Middle East (Egypt and Syria) supply concerns are now a thing of the past.
Therefore, any further above-average crude oil inventory build-up will increase the likelihood of a correction in commodity prices, and a greater movement in share prices. We say this as investor sentiment on most oil plays is determined by earnings and valuation multiples.
As such, investors should bet on a mix of asset-backed oil plays or exploration and production (E&P) companies, alongside fee-based pipeline firms which have long-term contracts that insulate them from sudden economic shocks. Our bullishness stems from the fact that the market is yet to fully price in since forward multiples are lower than prior upcycles.
Pick Winners from the Crowd
Identifying the best stocks in the oil and gas space for ones portfolio is no mean task. One way to narrow down the list of choices during this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Zacks Earnings ESP.
Earnings ESP is our proprietary methodology for identifying stocks that have the highest chance to surprise with their next earnings announcement.  
For investors seeking to apply this strategy to their portfolio, we have highlighted 3 oil and gas stocks that may stand out this earnings season:
3 Stocks to Bet on This Year
For investors seeking to apply this strategy to their portfolio, we have highlighted 3 oil stocks that may stand out in 2014:
Athlon Energy Inc. (ATHL)
Fort Worth, Texas based Athlon Energy Inc. is an independent exploration and production company. It is focused on the acquisition, development and exploitation of unconventional oil and liquids-rich natural gas reserves primarily in the Permian Basin.
Over the past fortnight, ATHL moved up to a Zacks Rank #1 from 3.
The firm is expected to report earnings on Feb 25. The Zacks Consensus Estimate is currently pegged at 24 cents. Analysts have been steadily moving their quarterly and full year estimates higher, suggesting an earnings momentum in the quarters to come. The momentum has carried over into the bourses as well and shares are currently up over 9.2% from the start of the year. This will remain a stock to watch out for the rest of this year.
Spectra Energy Partners, LP (SEP)
Spectra Energy Partners, LP is a growth oriented, master limited partnership recently formed by Spectra Energy Corp. (SE), headquartered in Houston, Texas, to own and operate natural gas transportation and storage assets. The company is one of the largest operators of natural gas pipelines and storage facilities in North America.
The partnership has a long-term earnings expectation of 12.45%. Although there are some concerns over growth rates, estimates have largely been moving higher, especially for the upcoming quarter. The partnership has a solid track record of earnings outperformance, and the most recent estimate suggests that this Delaware partnership will continue the trend.
Spectra Energy Partners currently has Zacks Rank #2 along with an earnings ESP +10.35%. It will report its next earnings on Apr 28.
Enbridge Inc. (ENB)
Canada-based Enbridge Inc. is a leading energy transportation and distribution company. As a transporter of energy, Enbridge operates the world's longest crude oil and liquids pipeline system in Canada and the United States. The company is also involved in natural gas transmission and midstream businesses in other countries. As a distributor of energy, Enbridge owns and operates Canada's largest natural gas distribution company. It provides distribution services in Ontario, Quebec, New Brunswick and New York State.
The Zacks Rank #3 stock has long-term earnings expectation of 11.0% which we feel is pretty much achievable given its focus on long-term contracts. Although there is some concerns over growth rates, estimates have largely been moving north, especially for the upcoming quarter. The company is slated to report its fourth quarter results on Feb 14.
Bottom Line
Oil and gas stocks are expected to be on a roll in the coming quarters with continued improvement in industry fundamentals. The economics of supply and demand is the fundamental driver of this industry. Previous strength in commodity prices helped oil and gas stocks to produce good returns in 2013. However, the subsequent lull – aptly reflected by a 1.75% year-to-date decline in the SIG Oil Exploration & Production Index (:EPX) – provides a window of opportunity for investors. As such, any catalyst would provide ample room for upside backed by a solid Zacks Rank and a positive Zacks Earnings ESP. Investors looking for growth this earnings season should be on the look out for these.

Read the analyst report on ATHL

Read the analyst report on SEP

Read the analyst report on ENB

Zacks Investment Research