Markets are a little more than halfway through the Q1 earnings season, with 57.6% S&P 500 members having reported results as of Friday, Apr 28.
Picture Emerging Thus Far
We now have Q1 results from 288 S&P 500 members that combined account for 63.8% of the index's total market capitalization. According to the latest Earnings Preview report, total earnings for these companies are up 13.7% from the same period last year on 8.2% higher revenues, with 76.4% delivering positive earnings surprises and 68.1% beating revenue estimates.
Energy Earnings Soar
The 'Energy' sector has been off to a spectacular start. For the 48.5% sector components on the S&P 500 index that have reported Q1 results, total earnings surged 360% on 30.7% higher revenues. While three-fourths of the companies have been successful in beating earnings estimates, 56.3% outperformed the top line.
Let's take a look at how oil and gas prices behaved during the first three months of this year.
Q1 Report Card: Prices Move Lower but Recover from Year-Ago Lows
Despite hope offered by the biggest oil deal in a decade and a new pro-fossil fuel administration in the White House, crude prices incurred a loss of almost 6% for the first quarter as traders focused on the rising flood of U.S. shale-driven production. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more. With the recent uptick in U.S. shale production putting more pressure on the market, oil ended the first quarter at $50.60 per barrel, 5.8% lower than year-end 2016 prices.
Natural gas fared worse, dropping more than 14% in the Jan-Mar period, thanks to one of the mildest winters on record. A warmer winter translated into tepid requirement for the heating fuel and upended demand forecasts.
Despite the sequential fall, both oil and natural gas prices are in a sweet spot compared to the corresponding period of 2016. While crude slumped to a 12-year low, natural gas futures dropped to its worst level in almost 17 years.
Year-over-Year Gains Leads to Bullish Expectations
Ending the dismal trend from the past few quarters, a look back at the Q4 earnings season reflects that the overall results of the Oil/Energy sector finally turned the corner, driving the aggregate growth picture for the S&P 500 index.
The Oct-Dec 2016 period turned out to be a rather good one with the OPEC deal and extreme weather conditions engineering a hefty rise in oil and gas prices during the fourth quarter.
A historic OPEC production cut agreement, together with help from non-OPEC producers saw oil prices end the year at $53.72 a barrel, representing a gain of 11.4% sequentially and 45% for the year. Meanwhile, natural gas embarked on its own upward journey, with futures jumping around 25% just in the fourth quarter. Ending the year at $3.724 per million Btu (MMBtu) - up 59% from 2015 - the heating fuel was buoyed by a cold snap that translated into strong demand.
As a result, following eight back-to-back quarters of earnings declines, analysts said that the sector was likely to get better in the fourth quarter and clock its first positive earnings growth after two years. With estimate revisions going up following OPEC's Algeria grandstand, the Oil/Energy sector's earnings were expected to improve handsomely from the fourth-quarter 2015 levels.
True to the predictions, the sector came out swinging. For the sector components on the S&P 500 index, total Q4 earnings were up 17.1% on 2.0% higher revenues.
The picture looks rather encouraging for the ongoing Q1 earnings season as well. This is not surprising, considering that oil and gas both fell to multi-year lows in the year-ago period. In fact, the 'Energy' sector is set to turn around from a modest loss in the year-earlier period to improving positive earnings this quarter.
Importantly, as per our analysis, the aggregate dollar amount of earnings increase for the Energy sector is the highest of all 16 Zacks sectors, with Energy expected to earn a total of $7.7 billion in Q1 versus a loss $1.6 billion in the year-earlier quarter. The top line is likely to show impressive growth of 29.8% from the first quarter 2016 levels, while margins are set to improve 4.4%.
Stocks to Watch for Earnings on May 3
Let's see what's in store for five energy companies expected to come up with Mar quarter numbers on Wednesday, May 3 after the closing bell.
Firstly, there is Transocean Ltd.RIG , the world's largest offshore drilling contractor and leading provider of drilling management services.
In the fourth quarter of 2016, this Switzerland-headquartered rig operator obliterated estimates, buoyed by solid revenue efficiency and cost control initiatives.
Coming to earnings surprise history, the company has an excellent record: its outperformed estimates in each of the last four quarters, resulting in an average positive surprise of 879.74%.
However, our model does not indicate that Transocean is likely to beat on earnings this time around. 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 earnings. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
For the quarter to be reported, Transocean has an earnings ESP of 0.00%, while it carries a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank stocks here . Though a Zacks Rank #3 increases the predictive power of ESP, the company's ESP of 0.00% makes surprise prediction difficult. (Read more: Transocean to Report Q1 Earnings: What's in the Cards? )
Simultaneously, 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.
Transocean Ltd. Price and EPS Surprise
We also have Midland, TX-based Concho Resources Inc.CXO coming up with first-quarter 2017 results. As far as earnings surprise history is concerned, the company - an independent oil and gas explorer with producing properties mainly in the Permian Basin of southeast New Mexico and west Texas - has a good track of having outperformed estimates in the last three quarters.
But with an Earnings ESP of -3.23% and Zacks Rank #3, our proven model shows that an earnings beat is not guaranteed for Concho Resources in the to-be-reported quarter. (Read more: What's in Store for Concho Resources in Q1 Earnings? )
Concho Resources Inc. Price and EPS Surprise
Pioneer Natural Resources Co.PXD is another energy player scheduled to report quarterly numbers. Based in Irving, TX, the oil and gas finder's asset base is anchored by the Spraberry oil field located in West Texas, the Hugoton gas field in Southwest Kansas and the West Panhandle gas field in Texas Panhandle.
Regarding earnings surprises, Pioneer Natural Resources is on a smooth surface, having beaten the Zacks Consensus Estimate in three of the last four reports. Powered with the right combination of two key ingredients - an Earnings ESP of +7.14% and Zacks Rank #3 - our proven model shows that an earnings beat is expected for Pioneer Natural Resources in the to-be-reported quarter as well. (Read more: Pioneer Natural Q1 Earnings: Is a Beat in the Cards? )
Pioneer Natural Resources Company Price and EPS Surprise
We then have another upstream entity Murphy Oil Corp.MUR . Based in El Dorado, AR, Murphy Oil's exploration and production operations are focused on four key regions - North America, Atlantic Margin, Southeast Asia and Australia.
While aggressive cost reduction and strong production drove the company to outperformances in each of the past four quarters, the trend might not continue this time around. With an earnings ESP of -100.00% and a Zacks Rank #4, our proven model shows that an earnings beat is uncertain for Murphy Oil in the upcoming quarterly release. (Read more: Murphy Oil Q1 Earnings: Disappointment in the Cards? )
Murphy Oil Corporation Price and EPS Surprise
Lastly, there is North American energy infrastructure provider The Williams Companies Inc.WMB . The Tulsa, OK-based company's core operations include finding, producing, gathering, processing, and transportation of natural gas.
As far as earnings surprises are concerned, the company has a decent track of having trumped estimates twice in the last four quarters. But our model does not indicate that Williams Companies is likely to beat on earnings this time around, as it has a Zacks Rank #3 and an Earnings ESP of 0.00%. (Read more: Can Williams Companies Pull a Surprise in Q1 Earnings? )
Williams Companies, Inc. (The) Price and EPS Surprise
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