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Energy Sector to See Strongest Growth in Q3: 5 Top Stocks

Zacks

We are now at the beginning of the Q3 earnings reporting cycle. Only 5.2% of the total S&P 500 companies have reported their numbers so far, while none of the energy companies have reported their quarterly earnings yet.

It should be noted that crude supply glut concerns have eased during the past July-to-September quarter, and this improvement is reflected in the Earnings Trends report that shows the energy sector as the prime contributor to the index’s year-over-year earnings growth.

Meanwhile, we have used our proprietary screening tool to pick a few energy stocks that are poised to post strong Q3 numbers.

Energy to Lead S&P 500 in Q3


Here at Zacks, we divide the S&P 500 index into 16 major sectors, and the energy sector will likely contribute the most in Q3. We expect the sector to witness 123.1% year-over-year earnings growth on 17.8% gain in revenues.

Eight of the 16 sectors will likely see year-over-year declines in third-quarter earnings while the rest, excluding conglomerates and the energy sector, are projected to report single-digit earnings growth. Only the energy sector is predicted to register triple-digit earnings growth. Excluding the energy sector, the S&P 500 index is anticipated to decline 0.7%.

Record Crude Price Backs Energy

As per macrotrends, The West Texas Intermediate (WTI) crude saw a 12.2% gain in the third quarter of 2017 after two consecutive quarters of decline this year. Notably, this is the highest quarterly gain since the April-to-June quarter of 2016.

Also, according to The U.S. Energy Information Administration (EIA), the average monthly price for the first two months of third-quarter 2017 was higher than the year-ago comparable period. Lower global crude inventory primarily supported the crude price rally in the third quarter.

Oversupply Concerns Ease in Q3

Per the EIA, during the July-to-September quarter of this year, worldwide oil inventories decreased by 500,000 barrels per day (B/D). With this, the inventory level fell for three quarters in a row.

According to The Oil & Gas Journal, Organization of the Petroleum Exporting Countries (OPEC) produced an average of 32.9 million B/D in the third quarter as compared to last November’s 33.4 million B/D.

Thus, it can be safely concluded that the leading crude exporter’s landmark production cut deal primarily supported the draws in global crude inventory.

Bet on Oil/Energy Stocks

Crude prices determine the fate of energy players. With the massive third-quarter crude improvement, upstream energy players are expected to report strong Q3 numbers. Companies involved in exploration and production activities will likely gain, while contract drilling players and drilling equipment makers are expected to clinch more contracts.

Choosing stocks with earnings beat potential might be a difficult task unless one knows the process to shortlist. One way to do this is to pick stocks that have the combination of a favorable Zacks Rank — #1 (Strong Buy), #2 (Buy), or #3 (Hold) — and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming 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%.

Based in Vernier, Switzerland, Transocean Ltd. RIG is a contract drilling firm for offshore energy players. The company, expected to report Q3 numbers on November 1, carries a Zacks Rank #2 and an Earnings ESP of +73.86%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Transocean surpassed the Zacks Consensus Estimate in the last four quarters, and has an average positive earnings surprise of 441.52%.

Canadian Natural Resources Limited CNQ, headquartered in Calgary, Canada, is an oil and natural gas exploration and production company with operations in the promising resources of Western Canada.

Presently, the company sports a Zacks Rank #1 and an Earnings ESP of +46.94% for the third quarter, likely to be reported on November 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Based in Minnetonka, MN, Northern Oil and Gas, Inc. NOG is an upstream energy firm with prospective oil and gas resources in the Williston Basin Bakken.

Northern Oil carries a Zacks Rank #2 and an Earnings ESP of +33.33%. The exploration and production player is expected to report Q3 numbers on November 14.

Abraxas Petroleum Corporation AXAS, headquartered in San Antonio, TX, is primarily involved in the exploration and development of prospective U.S. oil plays.

The company, with an Earnings ESP of + 25.00%, carries a Zacks Rank of 2. Abraxas Petroleum is scheduled to release results on November 7.

Based in Houston, TX, National Oilwell Varco, Inc. NOV is a world leader in the design and manufacture of equipment used in oil and gas drilling and production.

National Oilwell is slated to release results on October 26. The company has an Earnings ESP of +15.03% and a Zacks Rank #2.

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