What's In Store For Oil Drilling Earnings On Aug 1: ATW, DO

We are in the heart of the second-quarter earnings season, with 41.6% of the S&P 500 members having reported already (as of Jul 27).

Q2 Earnings Picture So Far

So far, we have second-quarter results from 208 S&P 500 members that combined account for 50.5% of the index’s total market capitalization. Total earnings for these companies are down 4.7% from the same period last year while revenues are up slightly 0.4%. Coming to the beat ratio, 73.1% came up with positive earnings surprises and 51.9% beat revenue estimates as per the Earnings Trends report dated Jul 27.

Energy Sector During April–June Quarter

Expectedly, the ‘Energy’ sector has been a big drag on the aggregate growth picture. For the sector components on the S&P 500 index that have reported results, total earnings are down 86.9% on 23.8% lower revenues.

But the Energy sector’s results are so far better than expected, with 77.8% of companies beating on earnings.

Was the Quarter Favorable for Drillers?

Drilling activities were weak as revealed by the U.S. rig count that fell to record lows. However, the operating scenario was suitable for drillers due to sequential crude recovery – drilling business is directly related to oil prices.

The second quarter saw crude advancing more than 26% sequentially − the best quarterly percentage gain in seven years. Throughout the quarter, oil price improved significantly from mid-February, when West Texas Intermediate (WTI) crude fell to a 12-year low mark of $26.05 per barrel. Moreover, last month, oil prices settled above the psychologically important $50 per barrel level for the first time in more than 10 months.

In other words, with oil price increase, exploration and production activities will improve and spur demand for rigs. Overall, we can say that although the U.S. rig count touched a record low, the business scenario was favorable for drillers.

Let’s take a look at the expected earnings performance of two drilling players that are scheduled to post their quarterly results on Aug 1.

Leading contract driller Diamond Offshore Drilling Inc. (NYSE:DO) surpassed the Zacks Consensus Estimate in each of all the trailing four quarters, with an average positive surprise of 74.89%.

However, earnings beat in uncertain for the second quarter. This is because, as per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat estimates. We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

For the quarter to be reported, Diamond Offshore has an Earnings ESP of 0.00%, while it carries a Zacks Rank #3. Although, Zacks Rank #3 increases the predictive power of ESP, a 0.00% ESP makes surprise prediction difficult.

DIAMOND OFFSHOR Price and EPS Surprise

DIAMOND OFFSHOR Price and EPS Surprise | DIAMOND OFFSHOR Quote

Offshore drilling contractor Atwood Oceanics Inc. (NYSE:ATW) will report third-quarter fiscal 2016 earnings. The company’s average positive surprise was 13.91% for the trailing four quarters, in each of which it surpassed the Zacks Consensus Estimate.

However, our model does not indicate that the company is likely to beat on earnings this time around. This is because Atwood Oceanics has a Zacks Rank #3 and an Earnings ESP of -6.41%.

ATWOOD OCEANICS Price and EPS Surprise

ATWOOD OCEANICS Price and EPS Surprise | ATWOOD OCEANICS Quote

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