The fourth-quarter earnings season for energy sector kicked off recently with a host of companies expected to release results by this weekend. Notably, extreme volatility in oil and natural gas prices might affect the industry players’ fortunes this time around.

Q4 Report Card: Volatile Oil, Gas Realizations

So, how does the oil and gas price compare with the year-ago valuations?

Per the U.S. Energy Information Administration, WTI prices started the fourth quarter of 2018 at $75.30 per barrel and exited the period at a moderate $45.41. Meanwhile, in 2019, prices were $53.62 a barrel at the onset of the fourth quarter and scaled up to $61.06 at the end of December, reflecting a steady improvement in the fundamentals.

However, the news is not rosy on the natural gas front.

In fourth-quarter 2018, natural gas prices were $3.09 per MMBtu in the beginning and fell gradually to end December at $2.94 per MMBtu. Coming to 2019, the fuel was trading even lower at $2.28 per MMBtu at the inception of October and struggled throughout the quarter to close at $2.18 per MMBtu.

The divergent oil and natural gas prices in the fourth quarter cannot conclusively predict the earnings trajectory for the period. Let’s take a glance at the scenario to date.

Picture Thus Far

The latest Earnings Preview indicated that the energy sector’s fourth-quarter 2019 earnings are expected to have plunged 47.2% from the year-ago reported figure. At the same time, the top line is likely to have declined 4.5%.

Notwithstanding this gloomy outlook, oilfield services giants Schlumberger (SLB - Free Report) and Halliburton (HAL - Free Report) delivered better-than-expected fourth-quarter earnings, attributable to a robust international market activity. The two energy bigwigs put up an impressive show with respective end-of-year numbers.

Handful of Energy Players Poised to Tide Over Pricing Volatility

Clearly, energy investors have ample reasons to worry about. But pricing volatility does not necessarily suggest that all energy scrips have lost potential. In fact, there are a number of companies that are likely to beat on the bottom line, benefiting from the improving oil price environment.

Investing in companies with earnings beat prospects can fetch in handsome returns for investors. This is because a stock generally surges on a positive surprise.

How to Identify Potential Winners?

With a multitude of energy firms thronging the investment space, it is by no means an easy task for investors to select stocks with strong promises to deliver higher-than-estimated earnings. While it is impossible to be sure about such outperformers, our proprietary methodology makes the choice fairly simple.

Our research shows that for stocks with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), chances of a positive earnings surprise are as huge as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is an important ingredient of our proven model, which along with a top Zacks Rank creates the perfect combination to determine stocks with the best chances to pull off a positive surprise in the upcoming earnings announcements. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Our Choices

Tulsa, OK-based Magellan Midstream Partners, L.P. (MMP - Free Report) is a master limited partnership that owns and operates a diversified portfolio of energy infrastructure assets. The partnership primarily transports, stores and distributes refined petroleum products plus to a certain extent, ammonia.

The firm has an Earnings ESP of +3.81% and a Zacks Rank #3. It is scheduled to release earnings on Jan 30, before the market opens.

Magellan Midstream Partners, L.P. Price, and EPS Surprise

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Magellan Midstream Partners, L.P. price-eps-surprise | Magellan Midstream Partners, L.P. Quote

You may also consider NuStar Energy L.P. (NS - Free Report), which has a Zacks Rank #2 and an Earnings ESP of +1.32%. This San Antonio, TX-based master limited partnership engages in transportation and storage of crude oil as well as refined products in the United States, the Netherlands Antilles, Canada, Mexico and the U.K. The entity is set to release fourth-quarter earnings on Feb 5 before market open.

NuStar Energy L.P. Price and EPS Surprise

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NuStar Energy L.P. price-eps-surprise | NuStar Energy L.P. Quote

Meanwhile, Patterson-UTI Energy (PTEN - Free Report), one of the largest onshore contract drillers in the United States, has a Zacks Rank of 3 and an Earnings ESP of +2.46%. This Houston, TX-based oilfield services player will report fourth-quarter earnings on Feb 6.

Patterson-UTI Energy, Inc. Price and EPS Surprise

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Patterson-UTI Energy, Inc. price-eps-surprise | Patterson-UTI Energy, Inc. Quote

Chevron Corporation’s (CVX - Free Report) fourth-quarter results are scheduled to release earnings on Jan 31, before the closing bell.

The second-biggest American energy major is Zacks #3 Ranked and has an Earnings ESP of +3.68%.

Chevron Corporation Price and EPS Surprise

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Chevron Corporation price-eps-surprise | Chevron Corporation Quote

Plains All American Pipeline, L.P. (PAA), a master limited partnership, involved transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids, and refined products in the United States and Canada, is slated to report quarterly numbers on Feb 4, after the market closes.

This Houston, TX-based partnership with operations in the Permian Basin, South Texas/Eagle Ford area, Rocky Mountain, Gulf Coast and Manito in the United States, South Saskatchewan, Rainbow in Canada is a #3 Ranked stock and has an Earnings ESP of +11.57%.

Plains All American Pipeline, L.P. Price and EPS Surprise

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Plains All American Pipeline, L.P. price-eps-surprise | Plains All American Pipeline, L.P. Quote