5 Energy Stocks Likely to Top Q1 Earnings

The U.S. stock markets started this year on a bleak note led by a decline in crude oil prices. In mid-February, U.S. crude tumbled to below $27 per barrel, a 12-year low. This decline in oil prices adversely affected energy companies. Many of them that have reported their 1Q16 results which incurred heavy losses. Amid this gloom, we have selected such companies that have defied this discouraging trend, banking on solid fundamentals.

Factors that Affected Crude During Q1

The West Texas Intermediate (WTI) crude mostly traded below the $40 per barrel during Q1. This was primarily due to abundant supply of oil in the face of lackluster global demand.

Supply Worries: The primary reasons for the oil price weakness was the supply glut owing to the return of Iranian crude to the market after the U.S. lifted bans against the country. The boost in Iranian production not only negated the decline in production by the Non-OPEC members – especially the North American shale players – but also added to the already oversupplied commodity market. On top of that, Saudi Arabia - the leading player among the OPEC members- has been increasing production and competing for market share, thereby pressuring the already bearish market.

Weak Demand: Demand for oil across the globe has been declining due to slower growth in most developed and developing economies. Persistent weakness in the economy of the world’s second largest consumer of energy – China – is expected to keep the market oversupplied for a long period of time. Also, with most of the developed nations nearing their peak of oil consumption and companies becoming fuel efficient, the demand is unlikely to grow.

Gainers

The business of almost all oil exploration and production companies suffered during the January–March period. This was because the firms could not earn sufficiently with crude price hovering at its lowest ever level. 

However, for downstream energy companies involved in the refining and marketing of petroleum products, the slump in WTI crude oil price turned out to be a blessing in disguise. Low crude prices also helped midstream energy players as excess supply requires huge storage and transportation facilities.

Earnings Trend
So far, only 7.9% of the major oil players included in the S&P 500 index have reported their earnings as reflected in the Zacks Earnings Trend report. Out of these firms, 33.3% beat our Q1 earnings estimates.

Per the report, the outlook for Q1 is bleak for the oil/energy sector as earnings are projected to plunge 110.4% year over year. In fact, the sector’s earnings have been declining at an alarming rate over the last two quarters. This anticipated downturn is likely to affect the broader market (S&P 500 index in general) with a year-over-year decline of 9.4% during Q1. 

Investors should note that, excluding the impact of the energy sector, the markets will likely fall 4.1%. Including the impact of crude, however, the market is expected to see a decline of 9.4%. Hence, the energy sector can easily be seen as a major dampener in the overall Q1 earnings picture.

With such a somber earnings picture for the sector, investors are naturally getting wary of having energy stocks in their portfolio.

Nonetheless, our study here will point to the stocks that are been able to benefit from low crude prices. In fact, these companies also have a high probability to beating our estimates as they need low pricing to boost their earnings.

How to Make a Choice?

With several companies in the energy sector likely to underperform, picking a stock worth investing in might be difficult. However, the Zacks methodology could offer some relief in this regard. One could narrow down the list using a positive Earnings ESP as a guide, along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising estimates in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are five upstream energy stocks that are poised to beat estimates according to our methodology.

Earthstone Energy, Inc. (ESTE): Woodlands, TX-based Earthstone Energy is an independent oil and natural gas exploration and production company. The company focuses on acquisition, development, exploration, and production of onshore, crude oil, and natural gas reserves in the United States.

The company has an Earnings ESP of +11.77% and a Zacks Rank #3. Earthstone Energy is set to report Q1 results on May 12.

Transocean Ltd. (RIG): Switzerland-based Transocean is the world’s largest offshore drilling contractor and leading provider of drilling management services. The company’s fleet is considered to be one of the most modern and versatile in the world due to its emphasis on the technically demanding segments of the offshore drilling business.

Although the company’s performance is directly influenced by oil prices, our model reveals that Transocean will likely beat on Q1 earnings.

The company currently carries a Zacks Rank #3 and has an Earnings ESP of +3.85%. Transocean is expected to report earnings on May 4, after the closing bell.

Rice Energy Inc. (RICE): Canonsburg, PA-based Rice Energy is an independent oil and natural gas company, which is engaged in the acquisition, exploration, and development of natural gas, oil, and natural gas liquid (NGL) properties in the Appalachian Basin.
The company has an Earnings ESP of +11.11% and a Zacks Rank #3. Rice Energy is set to report Q1 results on May 4, before the opening bell.

Gulfport Energy Corp. (GPOR): Headquartered in Oklahoma City, Gulfport Energy is involved in the acquisition, exploration, exploitation, and production of natural gas, natural gas liquids (NGLs), and crude oil in the United States. The company’s principal operations are centered in the Utica Shale primarily in Eastern Ohio and Hackberry fields.

The Zacks Rank #3 stock has an Earnings ESP of +12.5%. It is expected to report Q1 results on May 3.  

Murphy Oil Corporation (MUR): El Dorado, AR-based Murphy Oil is a global oil and gas exploration and production company. The company explores and produces crude oil, natural gas and natural gas liquids (NGL) worldwide and focuses on four key regions – North America, Atlantic Margin, Southeast Asia and Australia.

The company carries a Zacks Rank #3 and an Earnings ESP of +24.14%. It is expected to report Q1 results on May 4, after the closing bell.  

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EARTHSTONE EGY (ESTE): Free Stock Analysis Report
 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
RICE ENERGY INC (RICE): Free Stock Analysis Report
 
GULFPORT ENGY (GPOR): Free Stock Analysis Report
 
MURPHY OIL (MUR): Free Stock Analysis Report
 
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