5 Energy Stocks That Crushed The S&P 500 In 2017

The S&P 500 index witnessed steady growth in earnings over the last three quarters and will likely report earnings growth in the fourth quarter as well. As per our report, the index garnered a total of $277.3 billion, $293.4 billion and $303.2 billion in the first, second and third quarters, respectively. For the October-to-December quarter, we expect higher earnings for the S&P 500 at $310.9 billion.

We note that the energy sector has been a major contributor to the S&P 500’s growth story. In fact, among all the 16 Zacks sectors in the index, energy is probably the only one which is expected to witness triple-digit earnings growth in Q4.

Hence, it seems prudent for investors to choose stocks from a sector that has clearly crushed the S&P 500 in 2017.

Healthiest Free Cash Flow Since Oil Weakness

Before considering any particular stock or sector, investors should analyze the security’s free cash flow. Free cash flow measures the amount of operating cash flow remaining for business investments after deducting capital spending.

Our proprietary model shows that the Zacks Oil-Energy sector has witnessed almost a 161.1% rise in free cash flow over the trailing 12 months. Also, the sectors free cash flow has been the healthiest since the free fall in crude price in mid-2014.

Reflecting the bullishness, long-term debt for the sector declined over the first nine months of 2017. Short-term debt also plunged reflecting the sector’s improving financial strength.

What’s Driving the Energy Sector?

The improving financial metrics were primarily supported by a partial recovery in crude price in 2017. Looking at the U.S. Energy Information Administration’s (EIA) average crude prices for all the months in 2017, it is clear that the commodity pricing scenario has been much better than the prior-year period.

The year 2017 has been a remarkable one for energy investors with the OPEC agreeing to extend the production cut deal beyond the first quarter of 2018, an imperative step to fight the global crude glut. On Nov 30, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord, first signed in late 2016. More than 20 oil producers, including leading exporters like Russia and Saudi Arabia, participated in the meeting.

As expected by most analysts, all crude exporters decided to extend the deal through 2018-end. Through the end of next year, Saudi Arabia, Russia and their allies pledged to put 1.8 million barrels a day of crude oil out of the market.

Which Energy Stocks Beat the S&P 500?

Year to date, the S&P 500 index rallied 20.6%. The U.S. stock market is regularly scaling all-time highs. Stocks have mostly rallied since last year’s election, with a booming U.S. economy, supportive monetary policy and robust corporate earnings being the key growth drivers. Expectations that the Trump administration’s proposed tax and regulatory reforms will help companies and consumers have boosted investors’ sentiments further.

There are energy stocks that have rallied higher than the S&P 500 on a year-to-date basis. Before zeroing in on the stocks, let us take a look at how the upstream, midstream and downstream businesses have fared in 2017.

The healthy oil price scenario was favorable for upstream business as explorers were able to sell the commodity at a higher price. This resulted in an increased number of drilling rigs at domestic oil resources, per the report of Houston-based oilfield services player Baker Hughes, a GE company (NYSE:BHGE) . According to the report, from Jan 6 to Dec 15, rig count jumped from 665 to 930.

Crude production surged on ramped up drilling which drove demand for midstream properties like pipeline and storage facilities. Companies engaged in refining and marketing businesses were major gainers as well. Free cash flow for the Zacks Oil Refining & Marketing industry rose 21.3% over the trailing 12 months. Higher refinery margins and utilization primarily supported the results.

Our Choices

Employing our proprietary Stock Screener, we found four energy stocks that have gained more than 20.6%, beating the S&P 500 index.The stocks also flaunt a Zacks Rank of #1 (Strong Buy) or 2 (Buy) with market capitalization of more than $1 billion.

Based in Sugar Land, TX, CVR Refining, LP (NYSE:CVRR) is a leading refining player. The partnership posted an average positive earnings surprise of 306.4% for the last four quarters. Also, we expect CVR Refining to post year-over-year earnings growth of an astounding 1,350% in 2017.

This #1 Ranked stock has surged 29.8% year to date. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

Delek US Holdings, Inc. (NYSE:DK) , headquartered in Brentwood, TN, is involved in refining and transportation operations.

The company will likely record year-over-year earnings growth of 154.3% in 2017. Delek has rallied 33.3% year to date and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Based in Dallas, TX, HollyFrontier Corporation (NYSE:HFC) is a leading domestic petroleum refiner. The company managed to surpass the Zacks Consensus Estimate in three of the last four quarters, with an average positive earnings surprise of 8.1%.

This Zacks #1 Ranked stock will likely see year-over-year earnings growth of more than 363% in 2017. HollyFrontier has rallied 45.3% year to date.

Galp Energia, SGPS, SA (OTC:GLPEY) , headquartered in Lisbon, Portugal, is an integrated energy player. The stock carries a Zacks Rank #2 and will likely post year-over-year earnings growth of 200% in 2017.

Year to date, the stock has gained 23%.

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