Yahoo Finance

The Q1 earnings season is in full swing and some of the largest Energy companies are set to release financial results tomorrow. To date, we have Q1 results from 288 S&P 500 members that combined account for 63.8% of the S&P 500 Index’s total market capitalization. According to the latest Earnings Preview report, total earnings for these companies are up 13.7% on 8.2% higher revenues, both on a year-over-year basis. So far, 76.4% companies delivered positive earnings surprises and 68.1% beat top-line estimates.

The Energy sector has made a good start this earnings cycle. For some sector components (48.5% to be precise) on the S&P 500 Index that have reported Q1 results, total earnings skyrocketed 360% on 30.7% higher revenues. Most importantly, 75% of the energy companies surpassed earnings estimates while 56.3% of the firms beat top-line expectations.

We expect matters to improve further and the sector is likely to clock its second consecutive positive earnings growth after eight quarters of declines.

Factors Influencing Commodity Prices

Despite the biggest oil deal in a decade and a new pro-fossil fuel administration in the White House, crude prices declined almost 6% in Q1. OPEC's historic accord to trim output and rebalance the demand-supply situation has stabilized the market to a large extent. However, U.S. shale players tried to make the most of the improving oil price scenario by increasing production. With the recent uptick in U.S. shale production putting pressure on the market, oil ended Q1 at $50.60 per barrel, down 5.8% from the 2016-end level.

Natural gas fared even worse. Price of the commodity plunged 14% in the January–March quarter, thanks to one of the mildest winters on record. A warmer winter translated into lesser requirement for the heating fuel, which in turn, upended demand forecasts.

However, both oil and natural gas prices are better placed than the corresponding period of 2016, in spite of the sequential fall. In the year-ago period, crude slumped to a 12-year low while natural gas futures dropped to its worst level in almost 17 years.

Trend Reversal in Energy Sector

Ending the dismal trend displayed in the past few quarters, the Oil/Energy sector finally turned the corner in the Q4 earnings season. In fact, the sector’s performance drove the overall growth of the S&P 500 Index.

The October–December quarter of 2016 turned out to be a rather good one with positives like the OPEC deal and extreme weather conditions resulting in a substantial increase in oil and gas prices.

The historic production cut agreement by OPEC, along with cooperation from non-OPEC producers, resulted in oil prices ending the year at $53.72 a barrel, up 11.4% sequentially and 45% on an annualized basis. Natural gas too advanced with futures increasing almost 25% in Q4. Ending the year at $3.724 per million Btu (MMBtu) – up 59% from 2015 – the heating fuel gained from strong demand in a frigid winter.

With estimate revisions going up following OPEC’s Algeria grandstand, the Oil/Energy sector’s earnings were expected to improve substantially from the year-ago comparable quarter.

True to predictions, the sector came out swinging. For the sector components on the S&P 500 Index, total Q4 earnings were up 17.1% on 2.0% higher revenues.

The picture is rather encouraging for the Q1 earnings season as well. This is not surprising as both oil and gas prices fell to multi-year lows in the year-ago period. In fact, the Energy sector may swing to earnings this quarter from a modest loss in the year-earlier period.

Per our analysis, the aggregate dollar amount of earnings increase for the Energy sector is likely to be the highest among all 16 Zacks sectors. This sector is expected to earn a total of $7.7 billion in Q1, comparing favorably with a loss $1.6 billion in the year-earlier quarter. The top line is likely to show an impressive growth of 27.2% from year-earlier level. Margins are anticipated to improve 4.3%.

Stocks to Watch for Earnings on May 2

Let’s see what’s in store for these four energy companies that are expected to report Q1 results on May 2, before the opening bell.

Newfield Exploration Company NFX is expected to report Q1 results after the closing bell. Our proven model does not conclusively show that the company is likely to beat the Zacks Consensus Estimate this quarter. The company has an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold). Though a favorable Zacks Rank increases the predictive power of ESP, the company’s 0.00% Earnings ESP makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Note that stocks with Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating on earnings. The combination of Range Resources’ favorable Zacks Rank and a positive Earnings ESP makes us confident about an earnings beat.

Conversely, the Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

Last quarter, Newfield Exploration had posted adjusted earnings of 49 cents per share, which beat the Zacks Consensus Estimate of 38 cents. The company had a positive earnings surprise of 28.95% in the last quarter. Moreover, it outpaced the Zacks Consensus Estimate in three out of the last four quarters.