As we enter the Q4 earnings season, this week will see reports from key energy companies. The partial recovery in crude price has strengthened the financial metrics of the energy sector — and helped them pay off a part of their huge debt.

The sector now has sufficient net operating cashflow to fund their capital spending. Also, the energy sector’s 3.7% dividend yield is lucrative, and is more than the 1.8% yield of the S&P 500.We believe that the fourth-quarter earnings season will likely see the strongest gain from the energy sector among all Zacks sectors.

Higher Oil & Gas Prices

The West Texas Intermediate (WTI) crude increased almost 20% in the October-to-December quarter of 2017, per The U.S. Energy Information Administration (EIA). Through most of November and the entire December, the commodity traded above the $55-per-barrel psychological mark. The extension of the production cut deal by OPEC players supported the rally in crude.  

On Nov 30, 2017, OPEC members met non-OPEC players to decide on an extension of the crude production cut accord, first signed in late 2016, beyond the first quarter of 2018. More than 20 oil producers, including leading exporters like Russia and Saudi Arabia, participated in the meeting. As expected by most analysts, all crude exporters decided to extend the deal through 2018-end. Through the end of this year, Saudi Arabia, Russia, and their allies have pledged to put 1.8 million barrels a day of crude oil out of the market.

Like oil, natural gas has been in the bullish territory after gaining more than 25% through the fourth-quarter 2017.

Q4 Earnings Growth Likely to be Impressive

Among all the 16 Zacks sectors defining the S&P 500 index, energy will likely witness the strongest earnings growth in the fourth quarter, per our latest Earnings Preview. In other words, energy will likely be the only Zacks sector to report triple-digit earnings growth.

For the October-to-December quarter, we expect energy to post 178.5% earnings growth on 24.1% higher revenues. The rise in fourth-quarter earnings will likely be more than 152.3% recorded in third-quarter 2017.