Energy Sector to See Strong Growth in Q4: 5 Top Stocks to Buy

Evaluating market performance charts

As we enter the Q4 earnings season, this week will see reports from key energy companies. The partial recovery in crude price has strengthened the financial metrics of the energy sector - as represented by the Zacks Oil-Energy sector - and helped them pay off a part of their huge debt.

The sector now has sufficient net operating cashflow to fund their capital spending. Also, the energy sector's 3.7% dividend yield is lucrative, and is more than the 1.8% yield of the S&P 500. We believe that the fourth-quarter earnings season will likely see the strongest gain from the energy sector among all Zacks sectors.

Higher Oil & Gas Prices

The West Texas Intermediate (WTI) crude increased almost 20% in the October-to-December quarter of 2017, per The U.S. Energy Information Administration (EIA) . Through most of November and the entire December, the commodity traded above the $55-per-barrel psychological mark. The extension of the production cut deal by OPEC players supported the rally in crude.

On Nov 30, 2017, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord, first signed in late 2016, beyond the first quarter of 2018. 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 this year, Saudi Arabia, Russia, and their allies have pledged to put 1.8 million barrels a day of crude oil out of the market.

Like oil, natural gas has been in the bullish territory after gaining more than 25% through the fourth-quarter 2017.

Q4 Earnings Growth Likely to be Impressive

Among all the 16 Zacks sectors defining the S&P 500 index, energy will likely witness the strongest earnings growth in the fourth quarter, per our latest Earnings Preview . In other words, energy will likely be the only Zacks sector to report triple-digit earnings growth.

For the October-to-December quarter, we expect energy to post 178.5% earnings growth on 24.1% higher revenues. The rise in fourth-quarter earnings will likely be more than 152.3% recorded in third-quarter 2017.

Bet on Oil/Energy Stocks

Crude and natural gas prices determine the fate of the energy players. With the massive fourth-quarter crude and gas improvements, upstream energy players are expected to report strong Q4 numbers. Companies involved in exploration and production activities will likely gain, while contract drilling players and drilling equipment makers are expected to clinch more contracts.

Choosing stocks with earnings beat potential might be a difficult task unless one knows the way to shortlist. One way to do this is to pick stocks that have the combination of a favorable Zacks Rank - #1 (Strong Buy), 2 (Buy) or 3 (Hold) - and a positive Earnings ESP .

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their upcoming earnings announcements. 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%.

Headquartered in Irving, TX, Pioneer Natural Resources CompanyPXD is a leading upstream energy player with operations in the Permian Basin and Eagle Ford Shale region.

The company, expected to report Q4 numbers on Feb 6, sports a Zacks Rank #1 and an Earnings ESP of +2.45%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

QEP Resources, Inc.QEP , headquartered in Denver, CO, is also an upstream energy player with prime focus in the Permian Basin.

The company carries a Zacks Rank #2 and an Earnings ESP of +151.22% for the fourth quarter, expected to be reported on Feb 28. You can see the complete list of today's Zacks #1 Rank stocks here.

Headquartered in Houston, TX, Sanchez Energy CorporationSN is an oil and gas exploration and production firm with focus on onshore domestic assets.

Sanchez Energy carries a Zacks Rank #2 and an Earnings ESP of + 12.50%. The upstream player is expected to report Q4 numbers on Feb 28.

Continental Resources, Inc.CLR , based in Oklahoma City, OK, is focused on upstream businesses with operations in the domestic resources.

The company, with an Earnings ESP of +9.51%, sports a Zacks Rank of #1. Continental Resources is expected to release results on Feb 28.

Headquartered in Houston, TX, Occidental Petroleum CorporationOXY is an upstream energy firm with activities in domestic and international resources.

Occidental is slated to release results on Feb 13. The company has an Earnings ESP of +8.28% and a Zacks Rank #1.

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Pioneer Natural Resources Company (PXD): Free Stock Analysis Report

QEP Resources, Inc. (QEP): Free Stock Analysis Report

Sanchez Energy Corporation (SN): Free Stock Analysis Report

Continental Resources, Inc. (CLR): Free Stock Analysis Report

Occidental Petroleum Corporation (OXY): Free Stock Analysis Report

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

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

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