The energy sector has always been a key driver of the quarterly outperformance of the S&P 500 index. In the fourth quarter, the index recorded year-over-year earnings growth of 13.5%. However, excluding Energy, S&P 500’s earnings growth was 11.2%. Also, for first-quarter 2018, we expect Energy to surpass all other sectors, posting earnings growth of 65.7%.
Among all the industries belonging to the Energy sector, Oil & Gas-US Exploration & Production seems lucrative with healthy free cash flow and declining debt load. Partial crude price recovery is also a positive for the industry.
Oil & Gas-U.S. Exploration & Production Industry
The firms belonging to this industry are involved in exploration and production of oil and natural gas in prospective resources – like the Permian Basin, Eagle Ford, Utica and the Appalachian basin – spread all over the United States.
Operating in this industry needs huge capital spending. The explorers are vulnerable to volatility in oil and gas prices. But, the industry is rewarding too. Partial recovery in oil prices is highly favorable for this industry. From the historical low-mark of $26.21 per barrel hit in February 2016, the West Texas Intermediate (WTI) crude rose beyond the $60 psychological level. The extension of the production cut deal, first signed in late 2016, by the OPEC players through the end of 2018, primarily initiated the rally in crude.
Per the U.S Energy Information Administration (EIA), average WTI crude prices for the first two months of 2018 have been $63.70 per barrel and $62.23 per barrel, respectively. The average monthly oil price had never traded near the $60 per barrel mark since 2015.
The Analysis
There are few parameters that clearly show that investors willing to invest in the energy space should consider this industry.
Industry Rank
In terms of the Zacks Industry Rank, the Oil & Gas-US Exploration & Production industry is among the top performing industries.
