It has been a wild ride for the energy market in 2017, setting pulses racing for even the steadiest of investors.
Just a few months ago, or until September, the commodity had a very difficult year. In June, U.S. West Texas Intermediate (WTI) fell to nearly $42 a barrel — the lowest in ten months. Since then, the contract has risen about 37%. In fact, WTI hit a more than two-year high of around $59 recently.
Unlike other short-lived rallies over the past three years, we believe the current higher oil prices are a result of improving fundamentals. Declining inventories and the extension of OPEC-led supply cuts until the end of 2018 are the two major factors helping to balance the market and support the strong uptrend.
Production Cut Deal Extension
One of the significant reasons why the U.S. oil benchmark soared revolved around expectations that OPEC and other major producers will agree to expand their output-cut deal beyond March. True to predictions, the coalition prolonged the current dynamic for another nine months to the end of 2018.
The agreement, now renewed twice, keeps 1.8 million barrels a day (or 2% of global supply) off the market in an attempt to clear a supply glut. While there are several question marks over the degree to which the cartel members are adhering to their quotas, there’s no ignoring the fact that the cuts continue to narrow the market imbalances.
Sharp Inventory Drawdowns
Investors have pinned hopes of recovery over the U.S. Energy Department’s inventory releases that show multiple weeks of strong inventory draws in the domestic crude stockpiles – pointing to a slowdown in shale output. Oil stockpiles have shrunk in 27 of the last 35 weeks and are down more than 85 million barrels since April.
The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 448.1 million barrels, current crude supplies are 7.8% below the year-ago period though they are in the upper half of the average range during this time of the year.
Falling Capital Expenditure Also Comes to the Rescue
Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service producers.
With these efforts, many upstream companies have repositioned themselves to thrive even at lower prices. Moreover, slashing investments (in existing and new wells) have led to numerous project cancellations and production losses — another step in reducing the glut of crude.
Concerns Remain Despite Optimism
Currently at around $57 a barrel, the price of oil has more than doubled from the multi-year lows of early last year and it’s a whole new ballgame for investors who are now the most optimistic on the commodity than at any time in the past three years. They believe that the OPEC and Russian agreement will help whittle down huge global stockpiles and lead to even higher prices in the near-term.
But with U.S. drillers ramping up their output quickly in response to the OPEC-driven rally and rising rig count pointing to further rise in American production, the tightening of global oil market might get undermined and prices could again come under pressure.
The steady trend of rising domestic oil production continues to be the biggest headwind for the market. As per the U.S. Energy Department’s latest inventory release, U.S. output rose by 25,000 barrels per day (for the week ending Dec 1) to 9.7 million barrels per day – the most since the EIA started maintaining weekly data in 1983.
In the midst of such uncertainty, earnings performance has emerged as a decisive factor behind a stock’s performance. Speculations regarding earnings beat or miss have become a fundamental concern for investors that can either cheer or upset to the point of a hasty sell-off. Considered Wall Street’s dirty little secret, the formidable importance of earnings surprises can just not be ignored, whether you like it or not.
But from a broader perspective, it is the analysts’ consensus about the inherent strength of companies, coupled with their earnings performance, which should be closely followed for gaining better understanding about how to boost one’s portfolio.
Specifically, a history of positive earnings surprise generally works as a catalyst in sending a stock higher. It indicates the company’s ability to surpass the estimates. So, investors take it in their consideration while betting on the stock with the expectation that the company will do the same trick to outpace the estimates in the upcoming release.
4 Stocks that Posted Huge Surprises
We have zeroed-in on four stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy), and have recorded EPS (earnings per share) surprise of over 20% in the last four quarters.
BP plc BP, a #1 Ranked stock, is our first pick. London-based BP is one of the largest publicly traded oil and gas companies in the world. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses. BP surpassed estimates in three of the last four quarters at an average rate of 26.8%.
BP p.l.c. Price and EPS Surprise
Our second choice is ConocoPhillips COP – a major global exploration and production company with operations and activities in 21 countries. This Houston, TX-based Zacks Rank #1 stock, has a good earnings surprise history. It went past estimates in three of the last four quarters at an average rate of 152.3%.
ConocoPhillips Price and EPS Surprise
Then we have Northern Oil and Gas, Inc. NOG. A non-operator explorer and producer with primary focus on the Williston Basin in North Dakota and Montana, Minnetonka, MN-based Northern Oil and Gas has a 75% track of outperforming estimates over the last four quarters at an average rate of 175%.
Northern Oil and Gas, Inc. Price and EPS Surprise
Carrizo Oil & Gas, Inc. CRZO is another company we recommend. Headquartered in Houston, TX, Carrizo is focused on the acquisition, development, exploration, and operation of resource plays, predominantly in the Eagle Ford Shale of South Texas and Permian Basin of West Texas. The company carries a Zacks Rank of 2 and pulled off an average beat of 33.4% in the last four quarters.
Carrizo Oil & Gas, Inc. Price and EPS Surprise
Historical earnings surprise can be viewed as a key metric for share price outperformance and can greatly increase your odds of grabbing big winners.