Just over a year ago, oil was hovering around $110 per barrel. Now it’s struggling to cross $50. In between, it sunk to a 6½-year low of $38 a barrel.
All's Not Well with Oil
As is now widely recognized, the main culprit behind the plunge is a classic case of supply-demand mismatch. Surplus production remains an issue, particularly with the boom in American shale output. At the same time, weak global consumption is set to continue in the short- to medium term, thanks to Japan, Europe and now China. Finally, a strengthening dollar is holding back ‘black gold’ prices.
As a result, energy stocks have been dead money this year, brutalized by the slide in oil. Most stocks have slipped big time – 30% or more – as the commodity has collapsed and industry profit margins have sagged.
Q3: It's Still Wrecking Havoc
Third-quarter 2015 was more or less a repeat of the first two quarters: continuing oil price weakness. West Texas Intermediate (WTI) crude futures during the Jul–Sep 2015 period hovered mostly between $45 and $55 per barrel. In fact, the commodity tallied a loss of 24% for the quarter. Well into the final 3 months of the year, crude price is still low with no sign of a recovery on the horizon.
Some Companies Stood Tall Amid the Carnage
Going by the past year’s track record of oil prices, the term ‘energy stock’ probably conjures an image of sharp fall in share prices and investment dollars going down the drain. However, that isn't necessarily the case – there are a number of companies that have soundly beaten our third quarter earnings estimates. Looking at our Earnings Trends report, things become clearer.
For the 65% industry components that have come out with their numbers – comprising 85.5% of the sector market capitalization – 76.9% beat EPS estimates. Being the most studied number in a company’s financial statement, earnings outperformance – a significant one at that – generally tends to lift share prices.
How to Select the Right Stocks?
Now for that awkward business of actually selecting the stocks.
With a number of energy companies reporting earnings beat over the past few weeks, we have used our Zacks Stock Screener to find out the best stocks. In particular, we have shortlisted 5 energy companies with a Zacks Rank # 2 (Buy) and last EPS surprise in excess of 10%.
Noble Corp. plc NE: An offshore drilling giant, Noble Corp. boasts a fleet of 32 drilling units, including 17 semisubmersibles and drillships and 15 jackups, mainly specializing in ultra-deepwater and high-specification drilling opportunities worldwide. The Zacks Rank #2 contract drilling services provider reported third-quarter 2015 earnings of 72 cents per share on Oct 28. The results comfortably beat the Zacks Consensus Estimate of 54 cents by 33%. Strong operational execution and cost-management efforts led to the outperformance
QEP Resources Inc. QEP: Denver, CO-based QEP Resources is a leading independent energy company engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. On Oct 28, it reported better-than-expected third-quarter 2015 results on strong production growth. The domestic oil and gas explorer announced adjusted earnings per share of a penny, which compared favorably with the Zacks Consensus Estimate of a loss of 9 cents – a positive surprise of 111.11%.
Suncor Energy Inc. SU: Calgary, Alberta-based Suncor Energy is Canada’s premier integrated energy company. Suncor's operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand. At its third quarter earnings release on Oct 28, the company came out with operating earnings per share of 21 cents, breezing past the Zacks Consensus Estimate of 10 cents by 110%. Strong refinery utilizations along with higher contributions from Oil Sands operations led to the outperformance.
Whiting Petroleum Corp. WLL: Headquartered in Denver, CO, Whiting Petroleum is an independent oil and gas exploration company with primary operations in the Rocky Mountain and Permian Basin regions of the U.S. The energy explorer reported third quarter adjusted loss of 17 cents per share, 32% narrower than the Zacks Consensus Estimate for a loss of 25 cents despite the challenges that a steep drop in oil price tagged along. The outperformance came on the back of lower costs and higher production.
Antero Resources Corp. AR: Antero Resources is an independent exploration and production company engaged in the exploitation, development and acquisition of natural gas, NGLs and oil properties located in the Appalachia Basin. The Denver-based firm lost a penny per share for the third quarter reported on Oct 28, as against the Zacks Consensus Estimate for 6 cents loss. The 83.33% positive earnings surprise could be attributed to record volumes and reduced operating costs.
Bottom Line
Despite the sharp fall in oil prices, there are certain energy companies that have beaten the Zacks Consensus Estimate. They certainly hold the potential to make investors standout gains even in these capricious times
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