The crude space has been in a state of pandemonium over the past one year and a half. The market has also been under the threats of energy infrastructure damage from hurricane Joaquin and the Syrian war prompted by Russian air attacks.

West Texas Intermediate (WTI) crude price is currently hovering around $45 per barrel, less than half the price of the commodity during the mid-2014 level, when oil was trading above $100 per barrel.

Rig Count Slump Continues

In its latest report, Houston-based oilfield services company Baker Hughes Inc. BHI reported a fall in the U.S. rig count (number of rigs searching for oil and gas in the country) from the previous week. The decline stemmed mainly from a lower number of oil-directed rigs. This is the fifth consecutive week to have seen a drop in the rig count.

Oil Rig Count: The count, which rocketed to the highest figure of 1,609 in Oct 2014 since Baker Hughes started breaking up oil and natural gas rig counts in 1987, fell by 26 to 614. The current tally is still on the low end of the almost five-year range and well below the previous year’s rig count of 1,591.

Natural Gas Rig Count: The count fell by 2 to 195. As per the most recent report, the number of natural gas-directed rigs is down almost three-fourth from its recent peak of 811 reached in 2012. In fact, the current natural gas rig count is almost a massive 88% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 330 active natural gas rigs.

Yet Production Keeps Rising

As per the U.S. Energy Department's latest inventory release, at 457.92 million barrels, the current crude supplies are up 28% from the year-ago period and are near the highest level during this time of the year in 80 years at least.

On the natural gas front the current storage level – at 3.538 trillion cubic feet (Tcf) – is up 454 Bcf (14.7%) from last year and 152 Bcf (4.5%) above the five-year average.

We feel the sinking rig count is a blessing in disguise for the beleaguered energy space. This is due to the simple fact that over the past decade the space has seen a mammoth rise in drilling and production related capacities. This has invariably resulted in a significant rise in production levels. However, a falling rig count clears the path for stability, if not recovery, in prices.

Before Going Directly to the Stocks

A prolonged period of low oil prices has eventually lent cheap valuations to quality upstream assets. Therefore, we would like to draw investors’ attention to the neglected upstream space, where most players are trading below par. Smart investors might see this as a window of opportunity.

As such, with oil hovering around the $45-a-barrel level, investors with an appetite for gains should pick the upstream gems out of the rubble with the help of the time-tested Zacks Rank Methodology which arranges stocks from #1 (Strong Buy) to #5 (Strong Sell).

How to Make a Choice?

With a wide array of companies in the energy sector muddling up one’s stock picking power, the Zacks methodology could offer some relief. One could narrow down the list using the 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 four energy stocks that are poised to beat estimates according to our methodology.

Diamond Offshore Drilling, Inc. DO

Diamond Offshore is a leader in offshore drilling, providing contract drilling services to the energy industry around the globe with a total fleet of 45 offshore drilling rigs, including seven rigs under construction.

Diamond Offshore is expected to beat our third-quarter 2015 earnings estimates as it has a combination of Zacks Rank #2 and positive Earnings ESP of 28.07%.

The company is set to report third-quarter results on Oct 22, before the opening bell.

Cobalt International Energy, Inc. CIE

Cobalt International Energy, Inc. is an oil-focused exploration and production company. The Company explores for oil in the deep offshore waters of the U.S. Gulf of Mexico and West Africa, with an emphasis on sub-salt and pre-salt exploration, development and production.

Cobalt International Energy’s third-quarter prospects are bright as it has an Earnings ESP of +18.75% and a Zacks Rank #2.

The company is expected to report third-quarter results on Nov 3.

Callon Petroleum Company CPE

Callon Petroleum Company is an independent energy company focused on the acquisition, development, exploration and operation of oil and gas properties in the Permian Basin in West Texas.

The company will release results on Nov 4.

For the upcoming release, Callon Petroleum has an Earnings ESP of +33.33% and a Zacks Rank #2.

Warren Resources Inc. WRES

New York-based Warren Resources is involved in upstream operations like exploration and production of oil and gas resources.

Warren Resources will report third-quarter results on Nov 3, 2015, before the opening bell.

We believe the company will beat our estimates given its Zacks Rank #2 and Earnings ESP of +9.52%.

Bottom Line

Times are interesting for an astute investor in the energy space. However as we move into the final quarter of the year, we would advice investors to keep a close watch for two threats to the already embittered energy space. The first is the persistent macro weakness around the globe and the second is the likelihood of a warmer winter.

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