Flood Of Oil Earnings On Jul 27: HP, NOV, EQT, MPC, VLO, COP

We are entering the heart of the Q2 earnings season, with more than 50% S&P 500 members expected to come out with results by the end of this week.

Picture Emerging Thus Far

We now have Q2 results from 97 S&P 500 members that combined account for 28.1% of the index’s total market capitalization. According to the latest Earnings Trends, total earnings for these companies are up 8.4% from the same period last year on 5.1% higher revenues, with 78.4% positive earnings surprises and 72.2% beating revenue estimates.

At this stage, we don’t have too many results from the ‘Energy’ sector. However, a number of companies have earnings lined up pretty soon, and events are shaping up quite nicely for their report.

Energy: First-Half Recap

Last year, 'Energy' was the strongest S&P sector performer, with a market-thumping 24% return. In particular, November's historic OPEC-led production cut deal to alleviate a supply glut managed to buoy oil prices and stabilize them around the psychologically important $50 per barrel threshold. The commodity was on a stellar run on optimism surrounding the agreement, and the outlook for oil stocks was getting better.

The seemingly positive developments encouraged investors to bet on firming prices for 2017 with the oil industry finally hoping that 'this would be the year.' True to the strong sentiments, U.S. oil prices reached around $55 per barrel in late February, the highest level in 19 months.

However, the situation is drastically different now, with the commodity having floundered in recent weeks. By Jun 21, crude had cratered more than 20% from its February highs and officially plunged into bear territory. In fact, prices ended down 14.3% for the first half of the year – the worst performance since 1998.

Let's take a look at how oil and gas prices behaved during the second quarter of this year.

Strong Q2 Earnings Growth Prediction

A look back at the Q1 earnings season reflects that the overall results of the Oil/Energy sector were spectacular, driving the aggregate growth picture for the S&P 500 index.

The Jan-Mar 2017 period turned out to be a rather good one with both oil and natural gas prices benefiting from easier comparison figures from the year-ago period. While crude slumped to some 12-year low in the first quarter of 2016, natural gas futures dropped to its worst level in almost 17 years.

As a result, the sector – whose year-earlier comparison was to an aggregate loss – came out swinging. For the sector components on the S&P 500 index, total Q1 earnings had robust year-over-year dollar growth on 33.8% higher revenues. While 69.7% of the companies were successful in beating earnings estimates, 63.6% of them outperformed the topline.

The picture looks rather encouraging for the upcoming Q2 earnings season as well. This is not surprising, considering that oil and gas are both averaging higher compared to the second quarter of 2016 when the energy companies reported unusually low bottom-line. While earnings for the Oil/Energy sector are set to jump a massive 271.4% – the highest year-over-year growth among all sectors – the top-line is likely to show a growth of 15.1% from the second quarter 2016 levels.

Stocks to Watch for Earnings on Jul 27

Let’s see what’s in store for six energy companies expected to come up with Jun quarter numbers on Thursday, Jul 27.

Contract drilling services provider Helmerich & Payne Inc. (NYSE:HP) is expected to report before the opening bell.

In the previous quarter, this Tulsa, OK-headquartered provider of drilling rigs, equipment and personnel to explore for and develop oil and gas missed estimates, weighed down by lower drilling activity, especially in the international markets.

Regarding earnings surprises, Helmerich & Payne is on a bit of a slippery surface, having missed the Zacks Consensus Estimate in three of the last four reports. And our model indicates that the company is unlikely to beat on earnings this time around too.

This is because, as per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat earnings. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

For the quarter to be reported, Helmerich & Payne has an Earnings ESP of -6.45%, while it carries a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult. (Read more: Helmerich & Payne's Q3 Earnings: What's in the Cards?)

Simultaneously, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Headquartered in Houston, TX, National Oilwell Varco Inc. (NYSE:NOV) is another energy company set to report second-quarter 2017 results – this time after market closing. The company – which is one of the biggest manufacturers of drilling equipment – has a good track of having outperformed estimates in three of the last four quarters.

However, National Oilwell is likely to break the trend in the to-be-reported quarter. This is because the company is a Zacks Rank #4 stock that has an Earnings ESP of -14.29%.

Then there is Pittsburgh, PA-based integrated energy company EQT Corp. (NYSE:EQT) coming out with Apr-Jun operational results before the opening bell.

As far as earnings surprises are concerned, EQT – an Appalachia-focused natural gas firm with primary focus on production and midstream operations – has a decent record, having missed the Zacks Consensus Estimate just once in the last four reports. However, with an Earnings ESP of 0.00% and a Zacks Rank #3, our proven model shows that an earnings beat is uncertain for EQT in the upcoming quarterly release. (Read more: Can EQT Corp Spring a Surprise this Earnings Season?)

We also have Marathon Petroleum Corp. (NYSE:MPC) reporting second-quarter 2017 results tomorrow - again ahead of the opening bell. Coming to the earnings surprise history, this Findlay, OH-headquartered downstream operator has a good record: it’s gone passed estimates in three of the last four quarters, resulting in an average positive surprise of 189.75%.

But our model does not indicate that the company is likely to beat on earnings this time around, as it has a Zacks Rank #3 and an Earnings ESP of 0.00%. While a Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult. (Read more: Marathon Petroleum Q2 Earnings: What's in the Cards?)

The largest independent refiner and marketer of petroleum products in the U.S. Valero Energy Corp. (NYSE:VLO) is the fifth company to come out with quarterly numbers tomorrow morning.

Boasting of an excellent track of having outperformed estimates in each of the last four quarters, Valero Energy is likely to encounter a speed breaker in the upcoming release. This is because the combination of Zacks Rank #3 and an Earnings ESP of -1.85% makes it an unlikely candidate for earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lastly, there is Houston, TX-based exploration and production major ConocoPhillips (NYSE:COP) coming up with second-quarter numbers tomorrow before market open.

As far as earnings surprises are concerned, the company has a mixed record, having missed the Zacks Consensus Estimate in two of the last four reports. Our model does not indicate that the company is likely to beat on earnings this time around too, as it has a Zacks Rank #4 and an Earnings ESP of 0.00%.

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