In its latest report, Houston-based oilfield services company Baker Hughes Inc. BHI reported a sequentially flat U.S. rig count (number of rigs searching for oil and gas in the country) from the previous week. However, the report also disclosed a lower number of oil-directed rigs. This was the eighth consecutive week to have seen a drop in the oil 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 1 to 594. 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 1,595.
Natural Gas Rig Count: The count rose by 1 to 193. 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 drastically down 88% from its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 332 active natural gas rigs.
Crude Chaos?
The crude space has been in a state of chaos over the past year and a half. The market has also been stressed by a dearer green buck and weaker spot prices for domestic crude as a glut weighed on supplies.
West Texas Intermediate (WTI) crude price is currently hovering around $44 per barrel, less than half the price of the commodity during the mid-2014 level, when oil was trading above $100 per barrel.
Yet Production Keeps Rising
As per the U.S. Energy Department's latest inventory release, at 476.6 million barrels, the current crude supplies are up by 8 million barrels over the previous week and is at the highest level since Apr 2015.
On the natural gas front, the current storage level – at 3.814 trillion cubic feet (Tcf) – is up 434 Bcf (12.8%) from last year and 163 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 a recovery, in prices.
Before Going Directly to the Stocks
A prolonged period of low oil prices has ended up lending cheap valuations to quality upstream assets. So 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. Also per the head of Abu Dhabi’s Department of Economic Development, Ali Al Mansoori, crude prices at $50 per barrel is a “gift to the world” propelling economic growth.
As such, with oil hovering around the $44-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, 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.
Exterran Partners, L.P. EXLP
Exterran Partners, a master limited partnership, is the leading provider of natural gas contract compression services to customers throughout the United States. Exterran Holdings, Inc. EXH owns an equity interest in Exterran Partners, including all of the general partner interest.
Exterran Partners is expected to beat our third-quarter 2015 earnings estimate as it has a combination of Zacks Rank #1 and positive Earnings ESP of 10.23%.
The partnership is set to report third-quarter results on Nov 3.
Natural Gas Services Group Inc. NGS
NGS is a leading provider of small to medium horsepower, wellhead compression equipment to the natural gas industry. The company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for gas and oil production and plant facilities. NGS is headquartered in Midland, TX with fabrication facilities located in Tulsa, OK and Midland. Service facilities are located in major gas and oil producing basins across the U.S.
Natural Gas Services’ third-quarter prospects are bright as it has an Earnings ESP of +21.05% and a Zacks Rank #1.
The company is expected to report third-quarter results on Nov 5.
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 +100.00% 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.
We believe the company will beat our estimates given its Zacks Rank #2 and Earnings ESP of +9.09%.
Warren Resources will report third-quarter results on Nov 3, 2015, before the opening bell.
Bottom Line
This is an intriguing time 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 on 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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Click to get this free report BAKER-HUGHES (BHI): Free Stock Analysis Report EXTERRAN HLDGS (EXH): Free Stock Analysis Report EXTERRAN PTNRS (EXLP): Free Stock Analysis Report NATURAL GAS SVC (NGS): Free Stock Analysis Report WARREN RSRCS (WRES): Free Stock Analysis Report CALLON PETE-DEL (CPE): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research