Image: Bigstock

In early and mid-2020, the energy sector was devastated, with the space left for dead due to the unprecedented turmoil caused by the COVID-19 pandemic. While most businesses were hit hard by the coronavirus-induced lockdowns, the demand destruction and price plunge associated with oil was like no other. However, the commodity has recovered strongly from those depths to more than $60 a barrel, while the sector components have reacted very positively to this robust investment landscape.

The Great Energy Revival

Taking investors on a roller coaster ride, crude has made a stunning rebound — from the depths of minus $38 a barrel in April 2020 to reclaim a nearly two-year high above $66 in March.

The commodity has spent much of the past few months trading higher on continued vaccine-related developments and their successful deployment around the world, offering hope of an earlier-than-expected pickup in demand. The OPEC+ cartel’s calibrated production policy has also driven up oil. In its recent meeting, member countries of the OPEC+ group — a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia — decided to gradually loosen the output cuts from May through July, reflecting their confidence in the fuel’s demand.

Easing coronavirus infections, signs of robust demand in the world’s second-largest oil consumer, China, and the passage of the $1.9 trillion stimulus bill are the other positives in the oil story.

The renewed enthusiasm can be gauged from the fact that the Zacks Oil/Energy sector has gained 21.8% so far this year, handily outperforming the S&P 500 Index’s 11.3% appreciation. Meanwhile, several momentum stocks in the sector with a top Zacks Rank have provided generous returns in the year-to-date period. These stocks also have more upside left in the near term.

Upward Momentum Looks Set to Continue

Apart from vaccine breakthroughs, much of the positive argument is simply a bet on stronger economic growth in America and the subsequent improvement in consumer spending.

Following the epic meltdown in the second quarter of 2020, the U.S. GDP has rebounded strongly. With fundamentals remaining strong, the economy is witnessing an impressive recovery since the beginning of 2021. In particular, the vaccination drive on a priority basis has helped to ramp up the level of activities. An improving job market and expectations of record-high corporate profits in 2021 are signaling the economy’s steady return to full health. The massive fiscal stimulus, which has started to take effect, should further bolster the economy.

Further, Americans have built up forced savings of around $2.3 trillion over the pandemic. This unprecedented level of excess personal accumulation, together with the huge pent-up demand is expected to drive consumer spending in the near future. A 10.7% spike in first-quarter 2021 consumer spending is proof of the strong tailwind.

Against this positive economic backdrop, end-user fuel usage is expected to improve.

To tap the oil market’s rally, one could use momentum as an investing strategy. Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. In other words, while investors will essentially be buying high, they hope to sell even higher.

How to Benefit From the Improving Macro Backdrop

While all oil-focused stocks stand to benefit from rising commodity prices, the upward revision of earnings per share (EPS) estimate for 2021 is a crucial indicator in identifying potential winners in the space. This simply means the market is expecting the company to do good business this year. In particular, market participants are likely to be interested in those stocks that have witnessed positive EPS estimate revisions within the last 7 to 60 days.

Our Top Picks

We have narrowed down our search to five momentum stocks that have gained handsomely this year. Further, these energy stocks witnessed robust earnings revisions in the last 7 to 60 days and have strong growth potential. Each of our picks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy) and has a Momentum Score of A or B.

The chart below shows the price performance of our five picks in 2021.

Canadian Natural Resources Limited (CNQ Quick Quote CNQ - Free Report): This Canadian energy major boasts a diversified portfolio of crude oil (heavy as well as light), natural gas, bitumen, and synthetic crude oil. Canadian Natural Resources has decided to maintain its dividend despite last year’s historical drop in oil price, reflecting strength in its cash flows. The company is counted as a Canadian Dividend Aristocrat with an attractive yield.

The company has an expected earnings growth rate of 752.08% for the current year. Over 30 days, Canadian Natural Resources has seen the Zacks Consensus Estimate for its 2021 earnings increase 17.2%. The oil biggie carries a Zacks Rank #1 and has a Momentum Score of A.

Continental Resources, Inc. (CLR Quick Quote CLR - Free Report): Continental Resources has a premier position in the oil-heavy Bakken shale play. From 2019 to 2023, it expects oil equivalent production to see a compound annual growth rate of 8-10%. This will likely help Continental Resources generate an average annual free cash flow of $3.5-$4 billion over the five-year period. Notably, the company recently reported strong quarterly results owing to higher realizations of commodity prices and lower operating expenses. Further, the energy explorer recently reinstated its dividend payments, which offers certainty about the company's financial well-being.

Continental Resources has an expected earnings growth rate of 269.23% for the current year. Over 60 days, the company has seen the Zacks Consensus Estimate for its 2021 earnings improve 57.1%. Continental Resources carries a Zacks Rank #1 and has a Momentum Score of B.

Oceaneering International, Inc. (OII Quick Quote OII - Free Report): One of the leading providers of integrated technology solutions, Oceaneering International is active at all the phases of the offshore oilfield lifecycle. Oceaneering’s geographically diversified asset base is spread across the United States and the rest of the world and its revenues are evenly split between its international and domestic operations, lowering its risk profile. The company strives to improve its returns by driving efficiencies in cost and performance.

Oceaneering International has an expected earnings growth rate of 92.59% for the current year. Over 30 days, the company has seen the Zacks Consensus Estimate for 2021 earnings improve 90.5%. The energy services company carries a Zacks Rank #2 and has a Momentum Score of A.

Marathon Oil Corporation (MRO Quick Quote MRO - Free Report): The upstream energy company’s oil and gas operations are mainly concentrated in the United States (including Oklahoma, Eagle Ford, Bakken, and Northern Delaware) and Equatorial Guinea. Boasting financial stability and a solid balance sheet, Marathon looks poised for strong free cash flow generation through the next few years. Importantly, the company’s capital expenditure continues to fall as it keeps a tight leash on spending levels.

Marathon Oil, which recently raised its quarterly base dividend by 33%, has an expected earnings growth rate of 150.86% for the current year. Over 60 days, the company has seen the Zacks Consensus Estimate for its 2021 earnings surge 136%. Marathon Oil carries a Zacks Rank #2 and has a Momentum Score of A.

Enerplus Corporation (ERF Quick Quote ERF - Free Report): Enerplus focuses on Bakken and Three Forks formations in the Williston Basin in North Dakota, together with interests in the Marcellus Basin and waterflood projects in Canada. Banking on its low financial leverage and robust liquidity, this upstream energy firm is in a relatively better position to benefit from the improving price environment.

Enerplus has an expected earnings growth rate of 1,14.29% for the current year. Over 30 days, the company has seen the Zacks Consensus Estimate for its 2021 earnings improve 7.6%. Enerplus carries a Zacks Rank #2 and has a Momentum Score of B.