Philip van Doorn

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May 19, 2017, 7:24 a.m. EDT

Here are Wall Street’s favorite stocks for a rebound in oil-company earnings

Oil companies still offer value in a sky-high market

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By Philip van Doorn, MarketWatch


Matthew Busch/Bloomberg
Workers in a control room at a hydraulic-fracking site near Mentone, Texas.

Howard Gold made a compelling case for the energy sector, which offers the best value for investors at this stage in the eight-year-old bull market in stocks. In a nutshell, it’s about earnings expectations.

According to FactSet, S&P 500 /zigman2/quotes/210599714/realtime SPX +1.44%  companies are expected by analysts to show a 9.9% increase in earnings in 2017 from 2016. The technology, materials and financial sectors are expected to lift profits in the low double digits, but the energy sector is expected to see a 287.5% increase in earnings.

That, of course, incorporates expectations for a continued rebound for oil prices form the lows of early 2016, but it also bakes in the ramping up of U.S. production and expectations for a big improvement in efficiency for shale producers.

Also see: These out-of-favor oil stocks rose as much as 48% in 15 months — and there may be more gains

My MarketWatch colleague Ryan Vlastelica listed some examples (not recommendations) of exchange traded funds that might be considered by investors looking to make broad plays on the expected energy-sector rebound.

Oil and gas exploration ETFs:

  • SPDR S&P Oil Gas Exploration Production ETF /zigman2/quotes/203527521/composite XOP +7.31%  

  • iShares U.S. Oil & Gas Exploration & Production ETF /zigman2/quotes/207011605/composite IEO +4.57%

Oil services ETFs:

  • VanEck Vectors Oil Services ETF   

  • SPDR S&P Oil & Gas Equipment & Services ETF /zigman2/quotes/203361461/composite XES +9.86%  

  • iShares U.S. Oil Equipment & services ETF /zigman2/quotes/206923360/composite IEZ +8.57%  

It’s important to keep in mind that earnings expectations are based, in part, on a future rise in crude-oil prices. For example, on Wednesday, Jefferies analyst Jason Gammel lowered his average price estimate for Brent crude oil  to $59 a barrel for the second half of 2017 from $61, his 2018 estimate to $64 from $72, and his 2019 estimate to $67 from $70.

It’s possible that we’ll see earnings-estimate reductions for oil companies, but earnings growth expectations should still remain higher than those for any other sector over the next couple of years. That means you can expect volatility in the short term. A long-term investment in oil stocks now will require patience and a commitment of several years, or you may very well fall into the “buy high and sell low” trap.

Analysts’ favorite energy stocks

The S&P 1500 composite index is made up of the large-cap S&P 500, the S&P 400 Mid-Cap Index /zigman2/quotes/210599897/delayed MID +3.89%  and the S&P Small-Cap 600 Index /zigman2/quotes/210599868/delayed SML +4.17% . There are 83 stocks in the S&P 1500 energy sector, and 76 are rated by at least five analysts.

Among those 76 companies, 16 have “buy” ratings from at least 75% of analysts polled by FactSet:

Company Ticker Industry Share ‘buy’ ratings Share neutral ratings Share ‘sell’ ratings
Pioneer Natural Resources Co. /zigman2/quotes/206736173/composite PXD Oil and Gas Production 93% 7% 0%
Halliburton Co. /zigman2/quotes/210488727/composite HAL Oil and Gas Production 87% 10% 3%
Green Plains Inc. /zigman2/quotes/204775795/composite GPRE Ethanol Production 87% 13% 0%
SRC Energy Inc. Oil and Gas Production 87% 13% 0%
Carrizo Oil & Gas Inc. Oil and Gas Production 85% 15% 0%
Marathon Petroleum Corp. /zigman2/quotes/209634297/composite MPC Oil Refining/ Marketing 85% 15% 0%
U.S. Silica Holdings Inc. /zigman2/quotes/206361964/composite SLCA Metals/ Minerals 84% 16% 0%
Helix Energy Solutions Group Inc. /zigman2/quotes/201162236/composite HLX Oilfield Services and Equipment 83% 17% 0%
WPX Energy Inc. Class A /zigman2/quotes/204372171/composite WPX Oil and Gas Production 81% 19% 0%
Range Resources Corp. /zigman2/quotes/205059849/composite RRC Oil and Gas Production 81% 16% 3%
Concho Resources Corp. /zigman2/quotes/208942254/composite CXO Oil and Gas Production 80% 20% 0%
Tetra Technologies Inc. /zigman2/quotes/209715792/composite TTI Oilfield Services and Equipment 80% 20% 0%
Gulfport Energy Corp. /zigman2/quotes/203981280/composite GPOR Oil and Gas Production 78% 18% 4%
Schlumberger Ltd. /zigman2/quotes/201012972/composite SLB Oilfield Services and Equipment 77% 23% 0%
Nabors Industries Ltd. /zigman2/quotes/202661377/composite NBR Contract Drilling 77% 23% 0%
Newport Exploration Co. Oil and Gas Production 76% 24% 0%
Source: FactSet

You can click on each ticker to learn more about each company’s specialties, and also see charts, estimates, financial reports and SEC filings.

Here are earnings per share for 2016, along with EPS estimates for 2017, 2018 and 2019 for the group:

Company Ticker EPS - 2016 EPS estimate - 2017 EPS estimate - 2018 EPS estimate - 2019
Pioneer Natural Resources Co. -$3.35 $1.77 $4.16 $7.33
Halliburton Co. -$6.69 $0.95 $2.69 $3.76
Green Plains Inc. $0.28 $1.30 $1.88 $1.94
SRC Energy Inc. -$1.26 $0.43 $0.72 $0.95
Carrizo Oil & Gas Inc. -$11.27 $1.29 $2.21 $3.05
Marathon Petroleum Corp. $2.21 $2.90 $3.70 $3.77
U.S. Silica Holdings Inc. -$0.63 $1.57 $3.44 $4.16
Helix Energy Solutions Group Inc. -$0.73 -$0.18 $0.20 $0.36
WPX Energy Inc. Class A -$2.21 -$0.55 -$0.19 $0.43
Range Resources Corp. -$2.75 $0.77 $1.10 $1.62
Concho Resources Corp. -$10.85 $1.58 $2.26 $4.80
Tetra Technologies Inc. -$1.85 -$0.16 $0.13 $0.28
Gulfport Energy Corp. -$7.97 $1.17 $1.38 $1.89
Schlumberger Ltd. -$1.24 $1.49 $3.01 $4.46
Nabors Industries Ltd. -$3.64 -$1.25 -$0.09 $0.64
Newport Exploration Co. -$6.37 $2.31 $2.81 $3.55
Source: FactSet

As you can see, plenty of these companies are expected to keep losing money, even in 2018. So these have to be considered long-term plays. As always, if you see any investments that interest you here, it’s important to do your own research and form your own opinions, preferably with the assistance of your broker or investment adviser.

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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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