3 E&P Stocks Riding High Before Q2 Wraps Up - Earnings ESP

By Zacks Equity Research,

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Crude oil has been a dominant component of imports in the US. However, in recent times, the nation has gained momentum toward achieving energy independence. On the other hand, technological advancement has allowed oil and gas explorers to exploit areas which were previously inaccessible.        
According to the Energy Information Administration (EIA), the import downtrend is expected to continue, which means that domestic producers are now on the forefront. Domestic reserves have also grown with the advent of new methods and technologies. As per EIA forecasts, total US crude oil production is projected to average 8.5 million barrels per day (bbl/d) in 2014 and 9.3 million bbl/d in 2015, substantially higher than the 2013 level of 7.4 million bbl/d. The 2015 projections reflect the highest annual oil production since 1972.

Demand as well as prices remained favorable throughout the second quarter. Over the past few months, crude prices have mostly traded over the $100 per barrel mark. Most importantly, in June, the West Texas Intermediate (WTI) crude crossed the $106 threshold for the first time since Sep 2013. As such, most exploration and production firms had a good time booking profits. 

Glancing at Q2 So Far

Overall, the second-quarter results were in good shape, with a number of the companies beating estimates and offering promising growth prospects. In the oil/energy space, nearly 70% of the companies have already reported earnings. The second-quarter earnings expectation for the overall sector shows 15.5% year-over-year growth compared with a 1.4% decline in the first quarter.

As we near the end of the second-quarter earnings season, here are some options that can still be explored by investors who have missed out on investment opportunities offered by the sector so far this season.

Making the Right Pick

While the wide array of companies in the sector makes zeroing on the potential winners difficult, the Zacks methodology could offer some relief. One could narrow down the list using the positive Zacks Earnings ESP as a guide, along with a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of a positive surprise in their next 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%.

Here are three E&P stocks that are poised to beat estimates according to our methodology:

Carrizo Oil & Gas Inc . ( CRZO ) is a Zacks Rank #1 stock with an Earnings ESP of +15.69%. The Zacks Consensus Estimate for the second quarter currently stands at 51 cents per share. The stock has gained over 40% since the start of the year.

Based in Houston, TX, Carrizo Oil & Gas is an E&P company with acreage in the Niobrara formation and the Eagle Ford, Marcellus, Utica shale plays.

- Carrizo Oil & Gas is set to report second-quarter 2014 results before the opening bell on Aug 5.

Another stock to look out for this earnings season is Laredo Petroleum, Inc. ( LPI ), carrying a Zacks Rank #2. The company has an Earnings ESP of +5.88%. The Zacks Consensus Estimate for the second quarter is currently pegged at 17 cents per share.

Laredo Petroleum is engaged in the acquisition, development and exploitation of crude oil and natural gas properties, mainly in the Permian area of West Texas

 - Laredo Petroleum is expected to release second-quarter 2014 results on Aug 7, before the opening bell.

Headquartered in Denver, CO, Cimarex Energy Co. ( XEC ) is a Zacks Rank #2 stock with an Earnings ESP of +0.58%. The Zacks Consensus Estimate for the second quarter currently stands at $1.72 per share. Moreover, in the past two months, significant positive estimate revisions for the second quarter have been witnessed, which is another indication of an upcoming beat. Additionally, Cimarex Energy stock has increased over 35% year-to-date.

-      Cimarex Energy is slated to post second-quarter 2014 results on Aug 5, after the closing bell.

Bottom Line

The second quarter has been looking up so far for the energy sector. However, it is difficult to gauge at this stage whether this growth is reflective of the weak first-quarter or it indicates some hidden strength.

According to EIA, global oil demand is expected to grow another 1.5 million bbl/d in 2014 and 1.2 million bbl/d in 2015. Hence, betting on well-performing energy stocks should not disappoint investors in the long run. Moreover, an earnings beat should immediately translate into further price appreciation for these stocks.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

CARRIZO OIL&GAS (CRZO): Free Stock Analysis Report

LAREDO PETROLM (LPI): Free Stock Analysis Report

CIMAREX ENERGY (XEC): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Earnings
Referenced Stocks: EIA , WTI , CRZO , LPI , XEC

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