Earnings season can be a volatile period for stock ownership due to the uncertainty surrounding whether the underlying companies' results will beat or disappoint. However, there are ways for investors to gauge the trends behind certain companies, landing them on the bullish or bearish side of earnings expectations.
Making for potential opportunities, specific trends in the energy sector could make three oil stocks worth watching before, during, and after their earnings are announced this week. With some of these fundamental trends setting these companies up for a potentially bullish outcome, unexpected earnings beats may be on the horizon for them to set a longer-term uptrend.
These stocks include names like Exxon Mobil Co. (NYSE: XOM) to represent the bottom of the value chain in oil, with international integrated operations that see the benefit of bullish energy trends last. Then, there’s Hess Co. (NYSE: HES) in the middle of the chain, which gives investors a relatively quicker return with little added risk. For those looking into a high-risk and high-reward setup, shares of Transocean Ltd. (NYSE: RIG) can be considered at the top of the value chain.
Trends to Watch Out for in Oil Markets
Most commodities are driven by supply and demand, but that’s only half of the equation, mainly the academic equation. In real-world terms, the component of outlooks and sentiment play an even bigger role in the price of oil today, so setting expectations for the future might be the best place to start after supply and demand are gauged.
Supply has been a downtrend for the past quarter despite recent spikes in the United States' national oil stock level. Despite marginally lower supply, prices have yet to break above $80 a barrel comfortably, so this has to be a potential demand issue.
Bingo, the manufacturing PMI index for the U.S., has been on a 23-month consecutive contraction to severely compress oil demand for one of the world’s biggest economies. Then there’s China, which represents a significant share of global oil demand, whose economy has yet to come back online despite recent rounds of stimulus. These are the two demand gaps working against oil prices.
However, two of Wall Street’s best have recently appeared on Bloomberg and CNBC to express their views on higher inflation in the following months. These two are Stanley Druckenmiller and Paul Tudor Jones. So, even though demand is not here yet, expectations are definitely starting to trickle in favor of oil prices.
Exxon Mobil Stock: The Safer Route for Oil Demand
Due to its international presence, this $456.7 billion company has the advantage of stability and independence from operating in one single economy. However, this safety comes at the cost of lower growth potential, which is why investors at Scotiabank only see a $145 price target today, calling for a 21.3% upside from where the stock trades today.
More than that, Wall Street analysts only project up to $2.25 earnings per share (EPS) for the next 12 months, which is only a 5% growth from today’s $2.14 earnings. This is the stability factor that investors will get through a 0.88 beta, with the only caveat that slower growth will be had and, therefore, a lower potential upside.
Nonetheless, the stock has been performing well ahead of a potential oil price increase, with some institutional buyers also coming in. Those at Adams Natural Resources Fund recently added 0.8% to their Exxon Mobil holdings, netting their investment to $174.6 million today.
More Upside in Hess Stock: Reward Comes with Added Risk
Hess stock’s beta is higher than Exxon’s at 1.16 for added risk, but with added risk comes higher reward potential. This smaller $41.2 billion company is more concentrated in the United States oil market, giving it a much higher upside potential when the manufacturing sector returns.
This is why analysts at the UBS Group see a price target as high as $173 for Hess stock today, calling for an upside potential of as much as 25.4% from where the stock sits today. Knowing that the stock has plenty of upside potential, markets are paying a premium for Hess above the rest of the sector today.
A price-to-earnings (P/E) ratio of 16x commands a premium above the energy sector’s average valuation of 11.2x today, showing a willingness to overpay for this stock ahead of earnings.
Double-Digit Upside Potential for Risk-Takers in Transocean Stock
In volatility terms, Transocean stock carries a much higher beta of 2.8, making it a high-risk profile trade for investors to consider. However, as is the case with risky trades, the upside is also justifiable in this stock at the top of the value chain.
Transocean leases rig equipment to big oil names and the rate of lease contracts depends on the oil price. This means that Transocean is one of the first to get paid as soon as oil prices go up, which is why there’s so much Wall Street interest surrounding this stock.
Analysts at Susquehanna think that Transocean could reach a high of $7 a share, which calls for up to 69% upside from where it trades today. This is alongside the 6.3% reduction in the company’s short interest over the past month alone. Analysts also back up this upside through their EPS projections for the next 12 months.
Flipping from a net loss today to a net gain per share of $0.12 a share by next year gives Transocean enough growth potential to justify the risks investors take in this stock ahead of earnings.
