Fourth-quarter 2015 was more or less a replica of the preceding three quarters. Plunging crude prices during the entire quarter hammered the market and led many energy players to follow the bearish trend. Although none of the energy companies have released their fourth-quarter earnings results as of Jan 13, 2016, investors might still be thinking of excluding energy stocks from their portfolio following the persistent weakness in commodity prices.
Our study here will point to those stocks that are benefiting from low crude prices. In fact, these companies also have a high probability to beating our estimates as they need low pricing to boost their earnings.
Fourth-Quarter Oil
The West Texas Intermediate (WTI) crude traded much below $50 per barrel during the entire fourth quarter, thanks to the plentiful supply of the commodity amid lackluster global demand. In fact, crude even got a bitter taste of the below-$40-a-barrel mark in Dec 2015 after the Organization of the Petroleum Exporting Countries (OPEC) decided not to cut production at its Vienna meeting on Dec 4.
Investors should note that in reality, a war for market share has been raging among the likes of OPEC, the U.S. and Russia. Each of these markets has been pumping hard and competing for market share, completely ignoring the downtrend in oil price.
Below we show the price of WTI crude per barrel during the fourth quarter. The data is compiled by The Energy Information Administration (EIA) – which provides official energy statistics from the U.S. government.
Gainers
Low crude is a positive for those energy players involved in midstream activity, especially the refiners. This is because refiners buy raw crude from the exploration and production companies to produce refined petroleum products like gasoline. Hence, as in the prior quarters, the refiners have been benefitting from the low operating costs.
On top of that, excess supply calls for huge storage and transportation activities. As a result, companies involved in those activities are also expected to see overall gains. Likewise, the downstream firms are also expected to buy refined petroleum products at much lower prices in a bearish crude market.
How to Make a Choice?
With a wide array of companies in the energy sector muddling up the stock picking power, the Zacks methodology could offer some relief. One could narrow down the list using a positive Zacks Earnings ESP as a guide, along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with 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 stocks that are poised to beat estimates according to our methodology.
Valero Energy Corporation (VLO - Analyst Report): San Antonio, TX-based Valero Energy Corporation is the largest independent refiner and marketer of petroleum products in the U.S. It has a refining capacity of 2.9 million barrels per day across 15 refineries located throughout the U.S., Canada and the Caribbean.
The company has an Earnings ESP of +10.96% and a Zacks Rank #2. The Zacks Consensus Estimate for the to-be-reported is pegged at $1.46 per share.
Valero Energy is set to report fourth-quarter results on Jan 28, before the opening bell.
Western Refining Inc. (WNR - Analyst Report): Incorporated in 2005, El Paso, TX-headquartered Western Refining Inc. is an independent refiner and marketer of refined petroleum products in the Southwestern and Mid-Atlantic regions of the U.S.
The company’s fourth-quarter prospects are bright as it has an Earnings ESP of +7.35% and a Zacks Rank #3. The Zacks Consensus Estimate is 68 cents per share.
The company is set to report fourth-quarter results on Feb 25, before the opening bell.
Tesoro Corporation (TSO - Analyst Report): San Antonio, TX-based Tesoro is an independent refiner and marketer of refined petroleum products in western U.S.
For the upcoming release, Tesoro has an Earnings ESP of + 5.46% and a Zacks Rank #2.
Tesoro – which has a Zacks Consensus Estimate of $2.20 for the fourth quarter – will release results on Feb 1, after the closing bell.
Phillips 66 (PSX - Analyst Report): Based in Houston, TX Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. The company, in its current form, came into existence following the 2012 spin-off of ConocoPhillips' (COP) downstream business into a separate, independent and publicly traded entity.
The company, with Zacks Rank #2 and Earnings ESP of +1.34%, has a Zacks Consensus Estimate of $1.49. Phillips is expected to report fourth-quarter results on Jan 29.
Transocean Ltd. (RIG - Analyst Report): Switzerland-based Transocean is the world’s largest offshore drilling contractor and leading provider of drilling management services. The company’s fleet is considered one of the most modern and versatile in the world due to its emphasis on the technically demanding segments of the offshore drilling business.
Although the company’s performance is directly proportional to oil prices, our model reveals that Transocean will likely beat on fourth-quarter earnings.
The company − with a Zacks Consensus Estimate of 70 cents − currently carries a Zacks Rank #3 and Earnings ESP of +17.14%. Transocean is expected to report earnings on Feb 24.
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