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5 Energy Stocks Investors Should Avoid Ahead of Earnings

Zacks

Over the last three years, the energy market has experienced intense price volatility. However, it seems that following an extended period of relative weakness, energy stocks are finally on their way to recovery. With crude now firmly back over $60, the panic that swept over the market are all but gone. The incredible turnaround has stoked high expectations from the energy sector going into the first quarter of 2018.

Posting its third quarterly gain in a row, oil prices ended March 2018 up nearly 8% year to date. The commodity got off to a strong start this year with the West Texas Intermediate (WTI) crude futures climbing 7.1% in January. Though the benchmark tumbled 4.8% in February in the wake of a broad stock market selloff, it staged a rebound in March, with the contract up 5.6% for the month.

The first quarter of the year saw U.S. oil benchmark attain its highest settlement since December 2014 despite record high domestic production. Crude was supported by a variety of catalysts, including strong demand and continued production curbs from OPEC and its allies.

What’s encouraging is that the quarterly price appreciation extends an upbeat tone in crude trade into 2018 following the futures contracts’ back-to-back yearly increases. To be precise, the commodity rose about 7.5% in the first three months of 2018 to finish the quarter at $64.94 per barrel.


A year ago, crude futures hovered around the $50 per barrel mark.

Gains Leads to Bullish Expectations

A look back at the Q4 earnings season reflects that the overall results of the Oil/Energy sector were spectacular, driving the aggregate growth picture for the S&P 500 index. The October-December period turned out to be a rather good one with earnings for the sector recording a massive 153.7% jump from the same period last year – the most among all 16 broad Zacks sectors by a long way – on 23.6% higher revenues.

The picture looks rather encouraging for the upcoming Q1 earnings season as well, which is on track to be the fourth successive quarter of positive earnings growth for the Oil/Energy sector. This is not surprising, considering that crude prices improved considerably from the year-ago period. In fact, the strongest growth in Q1 is again set to come from Oil/Energy. Per the latest Earnings Preview, the bottom line for energy companies is expected to expand at a highly impressive rate of 60.2% on a year-over-year basis. Total revenues for the same set of companies are projected to grow 15.6%.

Not all Stocks Will Outperform Estimates

Sure, investing in companies that positively surprises estimates can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.

But, the flip side, not all energy companies will deliver positive earnings surprises despite the promising backdrop. And when a stock negatively surprises and its scrip plummets subsequently, it can destroy a trade, set back an entire portfolio, and make a trader lose his confidence. Few things can decimate a stock like a negative earnings surprise.

Utilizing Zacks' Earnings ESP system can greatly increase your odds of finding these potential underperformers before they report. And excluding these stocks from one’s portfolio can actually increase return by minimizing losses. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Apart from Earnings ESP, we have relied on our proprietary Zacks Rank and Style Score systems to help you avoid a few oil and gas companies this earnings season. Our research shows that stocks with a Zacks Rank of #4 (Sell) or 5 (Strong Sell) along with a VGM Score of D or lower are best avoided.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

As per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank of 1, 2 or 3 to beat estimates. Moreover, we caution against Sell-rated stocks (Zacks Ranks #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions

5 Energy Stocks to Steer Clear of This Earnings Season

Devon Energy Corporation DVN headquartered in Oklahoma City, OK, is an independent energy company engaged primarily in the exploration, development and production of oil and natural gas in the onshore areas of North America, including the United States and Canada. The company has a Zacks Rank #5 and an Earnings ESP of -25.66%. The unfavorable combination makes an earnings beat improbable in the quarter.

The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised 36.6% downward over the last 30 days. Devon Energy is expected to report first-quarter 2018 results on May 1. The company sports a VGM Score of D.

Halcón Resources Corporation HK, based in Houston, TX, is also expected to report a miss due to its Zacks Rank #5 and an Earnings ESP of -66.66%.

This oil and gas producer, focused on the Delaware Basin portion of the Permian Basin, is scheduled to reveal its results on May 2. The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised downward over the last 30 days – from break-even to a loss of 1 cent. Halcón Resources sports a VGM Score of D.

Halliburton Company HAL, based in Houston, is also expected to report weaker-than-expected earnings because of its Zacks Rank #4 and an Earnings ESP of -4.10%.

The oilfield services behemoth, which offers a variety of equipment, maintenance, and engineering and construction services to the energy, industrial, and government sectors, is scheduled to reveal its results on Apr 23. The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised downward some 4.5% over the last 30 days. Halliburton sports a VGM Score of D.

Next on our dreaded list is Cabot Oil & Gas Corporation COG, an independent oil and gas exploration company with producing properties mainly in the continental U.S. The company, which is also based in Houston, TX, has a Zacks Rank #4 and an Earnings ESP of -1.92%. Cabot Oil & Gas is scheduled to reveal its results on Apr 27. The company sports a VGM Score of D and has seen its estimate for first-quarter earnings being revised downward some 7.1% over the last 30 days.

Finally, Ranger Energy Services, Inc. RNGR — a domestic provider of well services, wireline, and processing services to oil and gas operators — has a Zacks Rank #4 and an Earnings ESP of -7.14%. This makes surprise prediction difficult for the Houston-based company.

Ranger Energy Services is scheduled to reveal its results on May 8. The stock has seen the Zacks Consensus Estimate for first-quarter earnings being revised 28.6% downward over the last 30 days. The company sports a VGM Score of D

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