Energy To Emerge As Q2's Biggest Winner: 5 Smart Picks

The Q2 earnings season is likely to be a blessing for the Oil/Energy sector, which is expected to see the highest growth in year-over-year earnings in the April–June quarter. An uptick in oil and gas prices will likely support the probable outperformance, bringing energy stocks into the limelight.

Energy Sector to Contribute the Maximum

We have divided the S&P 500 Index into 16 Zacks Sectors. As per our report, among all the sectors, Oil/Energy is likely to be biggest growth driver. While six of the sectors are projected to report a drop in year-over-year earnings, many are expected to see a minor hike. Meanwhile, the energy sector is projected to outshine the rest with year-over-year earnings growth of 303.6%. This marks a massive improvement from the last quarter‘s staggering earnings decline of 654.8%.

Oil & Gas Prices Trend Higher

The crude pricing scenario over the first two months of second-quarter 2017 was way rosier than the year-ago period. Hopes of OPEC’s production cut deal extension was the prime factor driving the year-over-year hike in prices during April and almost the entire of May. Market anticipations proved somewhat correct as OPEC and 11 non-OPEC players, including Russia, decided to extend the production cut deal until Mar 2018 in the Vienna meeting.

The same goes for natural gas as the average trading price of the commodity for each of the three months of the quarter was considerably better than the prior-year quarter. Thus, we can conclude that there was a modest recovery in natural gas prices during Q2 after the commodity had hit its lowest annual average price during 2016 in almost 20 years.

Good News for Energy Players

The increase in oil and gas prices might encourage exploration and production companies to pump more of the commodities. This is because explorers will be able to sell oil and gas at higher prices. In fact, the rig count data provided by oilfield service firm Baker Hughes Incorporated (NYSE:BHGE) showed that for each week in second-quarter 2017, shale drillers kept on adding rigs in the oil patches. More drilling is also expected to boost demand for oilfield service players that set up oil and gas wells.

Increased production of the commodities is likely to create more need for pipeline and storage infrastructures for transporting and storing the surplus output of oil and gas. Hence, second quarter could be favorable for midstream energy firms as well.

5 Prominent Picks

We have narrowed down our search based on a solid Zacks Rank and positive Earnings ESP. Earnings ESP is our proprietary methodology for determining stocks which have the best chances to surprise with their next earnings announcement. It provides 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%.

Houston-based Baker Hughes Inc. (NYSE:GE) recently merged with the oil and gas business of General Electric Company (NYSE:GE) . The business transaction has provided broader scale of products, a more diversified presence and cost synergies. These positives will help the combined unit compete better with oilfield service majors – Schlumberger Limited (SLB) and Halliburton Company (NYSE:HAL) – and also combat crude weakness.

Baker Hughes carries a Zacks Rank #2 (Buy). The company, with an Earnings ESP of +9.09%, is expected to report quarterly earnings on Jul 28. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Boardwalk Pipeline Partners, LP (NYSE:BWP) – headquartered in Houston, TX – provides oil and natural gas transportation and storage services in the U.S.

The partnership – anticipated to report quarterly earnings on Aug 7 – carries a Zacks Rank #2 and has an Earnings ESP of +3.45%. It is to be noted that the partnership has surpassed the Zacks Consensus Estimate in each of the last four quarters with an average positive earnings surprise of 17.31%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Headquartered in El Dorado, AR, Murphy USA Inc. (NYSE:MUSA) operates retail stores in the U.S. The company is expected to report quarterly earnings on Aug 2. Presently, Murphy carries a Zacks Rank #2 and an Earnings ESP of +25.29%.

Headquartered in Atlanta, GA, RPC, Inc. (NYSE:RES) is a provider of oilfield services to upstream energy companies in the U.S. On Jul 26, the company is expected to report quarterly earnings. Currently, RPC sports a Zacks Rank #1 and has an Earnings ESP of +38.46%.

Headquartered in Calgary, Canada, TransCanada Corp. (TO:TRP) is the owner of midstream energy infrastructure assets like oil and gas pipeline and storage properties. TransCanada will likely report earnings on Jul 27. The company has a Zacks Rank #2 and an Earnings ESP of +6.12%.

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