3 Crude Stocks to Beat Q4 Earnings In Spite of Oil Crash - Earnings ESP

The fourth quarter of 2014 saw crude prices obstinately trickling down. The major companies all slipped on oil prices and hit their 52-week lows. The market gurus had but one question: oil, where art thy bottom? And investors were stuck in a dilemma of to be or not to be invested in oil stocks. 

But investors need not fear or steer clear of energy stocks as the midstream and downstream players might as well surprise with their fourth-quarter results.

Crude Reality

The West Texas Intermediate (WTI) crude fell below $60 per barrel during the fourth quarter. This was primarily owing to plentiful North American shale supplies in the face of lackluster demand, sluggish growth in China and soft European economy. Strengthening of the U.S. dollar also impacted the demand for greenback-priced crude as oil turned expensive for importers.

Amid weak crude pricing, everybody was expecting a production cut from the international cartel of oil producers – Organization of the Petroleum Exporting Countries (OPEC) – as the measure could arrest the price slide. But OPEC’s decision of not curbing output at a meeting in Vienna on Thanksgiving Day, added to the oversupply concern and pushed crude prices further down.

Below we show the weekly decline in the price of WTI crude per barrel during the fourth quarter. The data is compiled by The Energy Information Administration (EIA) – which provides official energy statistics from the U.S. government.



Who Gains from Crude Price Fall?

The business of almost all the oil exploration and production companies suffered during the October–December period. This was because the players were not generating enough earnings after selling crude at considerably low prices. 

However, for downstream energy companies involved in the refining and marketing of petroleum products, the slump in WTI crude oil price turned out to be a blessing.

Refiners produce end products like gasoline after processing raw crude. Customers buy refined products from retail stations. With significantly lower input cost during the fourth quarter we can assume that downstream players will come out with flying colors.

The picture below shows the factors determining gasoline price, almost 62% of which depends on the price of crude. In other words, we can say that raw crude dictates the significant input cost for producing gasoline. 




Also, the business of midstream energy players did not have much to do with the slide in crude price. There was plentiful supply of the commodity and the need for transportation and storage operations was of prime importance.

So while the weak crude pricing environment spelled trouble for many oil majors, it spared the downstream and midstream companies. These are, in fact, believed to beat our estimates with their release fourth-quarter releases in the days to come.
 
How to Make a Choice?

With a wide array of companies in the energy sector muddling up the stock picking power, the Zacks methodology could offer some relief. One could narrow down the list using positive Zacks Earnings ESP as a guide, along with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are two downstream and one midstream energy stocks that are poised to beat estimates according to our methodology.

Valero Energy Corporation (VLO): San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the U.S. It has a refining capacity of 2.9 million barrels per day across 15 refineries located throughout the U.S., Canada and the Caribbean.

The company has an earnings ESP of +12.82% and a Zacks Rank #3. The Zacks Consensus Estimate for the to-be-reported is pegged at $1.17 per share. 

Valero Energy is set to report fourth quarter results on Jan 29, before the opening bell.

Phillips 66 (PSX): Based in Houston, TX Phillips 66 is an energy manufacturing and logistics company with refining and marketing, and specialties businesses. The company, in its current form, came into existence following the 2012 spin-off of ConocoPhillips’ (COP) downstream business into a separate, independent and publicly traded entity.

Phillips 66’s fourth-quarter prospects are bright as it has an earnings ESP of +3.76% and a Zacks Rank #3. The Zacks Consensus Estimate is $1.33 per share.

The company is set to report fourth-quarter results on Jan 29, before the opening bell.

Kinder Morgan Inc (KMI): Texas-based Kinder Morgan is one of the largest midstream energy companies in North America, operating approximately 80,000 miles of pipelines transmitting natural gas, refined petroleum products, crude oil, carbon dioxide and additional products. It has more than 180 terminals that store petroleum products and chemicals, as well as ethanol, coal, petroleum coke and steel. 

For the upcoming release, Kinder Morgan has an earnings ESP of +2.78% and a Zacks Rank #3. 

Kinder Morgan – which has a Zacks Consensus Estimate of 36 cents for the fourth quarter – will release results on Jan 21.

Bottom Line

No, oil is perhaps not touching its bottom any time soon. But that should not be the reason to draw a line at energy investments, at least not investments in our three suggested earnings plays. So, good luck. 
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VALERO ENERGY (VLO): Free Stock Analysis Report
 
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