Exxon Bleeds in Q2: 4 Oil Stocks to Cure the Pain

The oil price rout since mid last year may have shaken the confidence that investors have on the energy giants. ExxonMobil Corporation XOM – the largest U.S. oil company by market value, known for a resilient integrated business model – slipped on low commodity prices in the second quarter. The company's Upstream business gave a poor showing and its profits were its worst in the last six years.

This resulted in the energy major joining the bandwagon of integrated majors like Chevron Corp. CVX and BP plc BP which missed earnings expectations this season. Only Royal Dutch Shell plc RDS.A was able to cope with the free fall in commodity prices and reported higher-than-expected profits last week.

The pain in the energy space was not confined to the upper echelons only. The month of July witnessed almost 85% constituents of the S&P 500 index reporting their second quarterly numbers. Of this, one of the worst affected were players from the energy space which were down -60.6% on -31.7% lower revenues, with only 52% beating earnings estimates and 44% coming ahead of the consensus sales estimates.

What Ails Exxon?

ExxonMobil posted earnings per share of only a buck in the second quarter which came well below the Zacks Consensus Estimate of $1.13 and deteriorated from the year-ago profit of $2.98. The fiasco reflected in its share price on the NYSE, where it fell around 4.6% on Friday.

Low commodity prices dealt a blow to the Upstream business, though volumes improved. Quarterly earnings for the segment were $2 billion, down $5.9 billion year over year. And unlike the previous quarters, the performance of the Downstream business was not strong enough to reverse this falling trend. Downstream profits increased $795 million year over year to only $1.5 billion. The increase which was prompted by stronger margins was hurt by unfavorable volume and mix effects.

Some support was also lent by the Chemical segment which contributed approximately $1.2 billion to the company's profits. The upside of approximately $405 million from the year-earlier quarter came on the back of lower feedstock costs that drove margins.

The Haunted Past

Like any other commodity, the price of crude is determined by its market demand and supply. Since last June – when oil was trading around $100 per barrel – we have seen a prolonged plunge in crude. This was primarily owing to plentiful North American shale supplies when nobody seemed interested in buying, sluggish growth in China and a dull European economy. As of now, the West Texas Intermediate WTI crude is hovering around $47 per barrel.

Brighter Horizon

In spite of the second quarter debacle and the oil price carnage, the macro trends are signaling nascent signs of recovery. The U.S. economy accelerated in spring after a soft start in the first quarter. According to the "advance" estimate by the Bureau of Economic Analysis, the second-quarter output of goods and services increased at an annual rate of 2.3%, which was more than the revised 0.6% growth in the first quarter.

Also, we have seen the oil rig count rising by 21 last week, showing investors a ray of hope. Along with this, the U.S. Energy Department's latest weekly inventory release also showed an unexpected fall in the country's crude oil inventory.

Investors' hopes were rekindled on oil and the commodity, which showed early signs of some reversal after losing almost 8% of its value year to date. While the recent turn of events in Greece, Iran and China created pressure, a stronger dollar made the greenback-priced crude dearer for investors holding foreign currency.

Moreover, higher consumer spending on big ticket items including new cars and trucks, and housing helped the second-quarter GDP gain momentum. Real personal consumption expenditure accelerated by 2.9%, following a 1.8% increase in the first quarter.

Road Ahead for Energy Players

Obviously, a positive momentum has ditched ExxonMobil. But this certainly does not mean the end of the road for energy investors.

Of course, ExxonMobil is a force to reckon with. But the energy space has several other promising stocks to choose from.  Based on growth, valuation and earnings data, we have picked three stocks that have strong potential to yield solid returns over the next 1–3 months. Plus, each of these stocks has a top Zacks Rank.

Western Gas Equity Partners, LP WGP

Western Gas Equity Partners, LP engages in gathering, processing, compressing, treating and transporting natural gas, condensate, natural gas liquids and crude oil in the United States. This Zacks Rank #1 (Strong Buy) company has a long-term estimated earnings per unit growth rate of 28.7%, much higher than the industry average of 8.2%.

Moreover, it has a higher return on equity (ROE), return on assets (ROA) and return on capital ROC than the respective industry averages. The stock posted strong numbers in the recently reported second quarter and surpassed our earnings estimate by 29.17%.

Petróleo Brasileiro S.A. - Petrobras

Petrobras is the largest integrated energy firm in Brazil. The company boasts healthy production growth and has announced several important discoveries of late. Also, we appreciate its cost-cut measures like asset sales and reduced capital spending. This Zacks Rank #2 (Buy) company has a long-term estimated earnings per share growth rate of 27.0%, much higher than the industry average of 22.1%. Moreover, it has a higher ROA and ROC than the respective industry averages.

The stock has witnessed 4 positive estimate revisions over the last 60 days for second-quarter 2015. Our earnings per share estimate has gone up from 11 cents for the to-be-reported quarter to 23 cents over the same time frame. The company beat our earnings estimate in 2 out of the last 4 quarters, with an average of 87.5%.

Valero Energy Partners LP VLP

Valero Energy Partners owns, operates, develops, and acquires crude oil and refined petroleum products pipelines, terminals, and other transportation and logistics assets. This Zacks Rank #1 company has a long-term estimated earnings per unit growth rate of 24.0%, much higher than the industry average of 11.2%. Also, it has a higher ROA and ROC than the respective industry averages.

The stock beat our consensus estimate in all the last four quarters by an average of 11.74%. The stock shot up almost 4.5% over the last one-week period. The partnership, with a market capitalization of $2.79 billion, rewards stakeholders with a dividend yield of 2.60%.

EV Energy Partners LP EVEP

EV Energy Partners engages in the acquisition, development, and production of oil and natural gas properties. The partnership has a Zacks Rank #2.  EVEP has an Earnings ESP of 12.50% for Q2, suggesting that estimates have been moving in the right direction. This Zacks Rank #2 (Buy) partnership has a long-term estimated earnings per unit growth rate of 8.4%. Also, it has a stable ROA and ROC unlike the respective industry averages.

The stock price has also seen a positive trend as since last week, as EVEP has surged 4.69%. This is due to the fact that this oil exploration and production player's quarterly earnings estimates are steadily climbing from 19 cents per share to 24 cents over the past one month. EV Energy Partners also beat our estimate in 2 of the last 4 quarters, by an average of 16.41%.  

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