Top 3 Energy Stocks That Defied The Oil Carnage In 2014

The year 2014 has been a mixed bag for energy investors. While the first half was upbeat with crude oil surging past the $100 per barrel mark, the latter half was saddled with disappointment as the commodity plummeted to multi-year lows, dragging down stocks.

This is evident from the overall energy sector performance. While the year-to-date (YTD) gain of the S&P 500 (SPX) was about 13% (as of Dec 26, 2014), S&P 500 Energy (Industry Group) returned a negative 6.1%.

However, some stocks braved this price rout and came out with flying colors. Not only are their YTD returns in the green, but are also substantially higher than the S&P 500.

Before we handpick top 3 market beaters, let us take a quick look at the sector dynamics throughout the year.  

Crude’s Decent

The performance of energy stocks are largely tied to the underlying commodities – crude oil and natural gas. While natural gas averaged around $4 per Btu for the most part of the year, crude oil saw crests and troughs and the stock market rode high or dipped with it.  

In the first half of the year, oil surged over $100 per barrel amid turmoil and supply challenges. Energy stocks gained handsomely, bringing in lump-sum profits.  

In the second half, however, the commodity kept falling, breaking multi-year low records amid ample supplies and weak demand. Also, the international cartel of oil producers’ – Organization of the Petroleum Exporting Countries (OPEC) – decision against oil output cut and weaker demand projection for 2015 prompted further declines. Crude oil has nearly halved from its peak position and is currently trading near the mid $50s.  

Earnings Performance

Early 2014 was profitable for most energy companies. A large number of firms reported year-over-year earnings and revenue growth, benefiting from higher realizations. The overall sector reported 13.1% earnings growth in 2Q and 7.4% in 3Q.

Large integrated energy firms like Exxon Mobil (XOM - Analyst Report), ConocoPhillips (COP - Analyst Report) and Royal Dutch Shell plc 
(RDS-A - Analyst Report), and upstream players like Devon Energy Corporation (DVN - Analyst Report) and Apache Corp. (APA - Analyst Report) contributed largely to this growth, being the biggest benefactors of the oil price boom.

In the latter half, however, the oil-dominated upstream firms turned out as the biggest losers, with most of their profits being wiped off by the fall in oil price.

Large integrated companies with substantial downstream exposure and solid cash position were able to somewhat endure this slump. However, pure downstream companies like Tesoro Corp. (TSO - Analyst Report), Murphy USA Inc. (MUSA), Valero Energy Corp. (VLO - Analyst Report) and Western Refining, Inc. (WNR - Analyst Report), with their refineries and retail fueling stations, were the biggest winners as their earnings are negatively correlated to oil prices.

The midstream firms also performed well by virtue of their lesser dependence on the commodities and revenues streaming in from fee-based services. With a surge in production, the demand for transportation and storage services remained strong, fueling growth.  

Let's zero in on 3 such market beaters. Each of these stocks has a favorable Zacks Rank which ensures their outperformance over the near-to-medium term even in a low oil price environment.

3 Large-Cap Energy Stocks That Returned More Than S&P 500

Spectra Energy Partners, LP (SEP - Snapshot Report), based in Houston, TX, is a midstream energy firm with a portfolio of transportation and storage assets. The company has invested about $2.7 billion in growth projects in 2014. This should lead to further growth in the years to come.

Spectra Energy sports a Zacks Rank #1 (Strong Buy) and has gained 27.8% YTD. The company also has an average earnings surprise of 8.7% over the trailing four quarters. Rising estimates for the current quarter and current year signal more bullishness ahead.  

Tesoro Corp., based in San Antonio, TX, is an independent refiner and marketer of petroleum products in western U.S. Refining comprises over 80% of the company’s operating income, making it an attractive choice at the moment, with lower input costs and higher refined product demand.  

Tesoro presently holds a Zacks Rank #2 (Buy) and has gained 28.7% YTD. The company also has an average earnings surprise of 7.7% over the trailing four quarters. Large northward estimate revisions for the current quarter are likely to result in another beat.  

Magellan Midstream Partners LP (MMP - Analyst Report) is a Tulsa, OK-based master limited partnership that owns and operates a diversified portfolio of energy infrastructure assets, generating stable and recurring fee and tariff-based revenues.

Magellan Midstream also carries a Zacks Rank #2 and has gained 34.5% YTD. The company also has an average earnings surprise of 17.7% over the trailing four quarters.

Road Ahead

Currently, oil is deeply entrenched in a bearish territory. Several firms have lowered estimates for the energy sector companies’ upcoming earnings. The overall Q4 growth rate for the sector has flipped from a positive of 7% to a negative 17.6%, signaling troubled waters. Nonetheless, the above-mentioned midstream and downstream stocks are likely to better withstand the current situation and are good investment bets at the moment.

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