Crude might witness a reversal of its fortunes from the deep pit of $50 per barrel thanks largely to the volatile geo-political dynamics between the Islamic Republic of Iran and the Kingdom of Saudi Arabia.

Crude prices are witnessing a rebound in the face of Iran extending its ties with China to counter the slow progress on the lift of sanctions. The imbroglio that started to halt Iran’s march towards nuclear power is seemingly coming to a deadlock. The direct outcome of this geo-political disturbance was crude prices which were all set to fall below the $40 per barrel barrier at one point in the first quarter of 2015 is now witnessing early signs of recovery.

Iran started the reconciliation process last November when it reached a temporary accord with six world powers – the U.S., Great Britain, France, Russia, China and Germany – to restrict its nuclear activities in return for Tehran’s relief from international sanctions on oil, auto parts, gold and precious metals. Though Iranian oil export is not expected to rise significantly and flood international markets, the groundbreaking agreement was expected to go a long way in make it easier for the country to sell oil.

On the one hand the anti-Iranian wolf pack consisting of leaders like Israeli Prime Minister Benjamin Netanyahu, alongside hawkish members of the U.S. Congress are creating impediments over lifting of sanctions.

On the other hand, a pragmatic approach by the U.S. President Barack Obama is calling for a radical change in the approach towards Iran. Accordingly, Iran agreed last week to a framework with six world powers – the U.S., Great Britain, France, Russia, China and Germany – to restrict its nuclear activities in return for Tehran’s relief from international sanctions on oil, auto parts, gold and precious metals. However, this seemingly set to motion the rebounding fortunes of crude price.

Per Barrel Reaction

The uptick was felt distinctively on Tuesday when both the major benchmarks of crude with WTI crude and Brent crude gained 3.4% and 1.7% to $53.98 per barrel and $59.10 a barrel, respectively.

However, with market speculation rife that the Iranian dawn is still on a distant horizon, arch rival Saudi Arabia the prominent member of the apex body of international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries – continued milking the Asian market. The Saudi decision to hike the price of oil to be exported to Asia this May comes in the wake of the realization that Iranian dawn in oil exports is still far away. This is the second hike by the state-owned Saudi Arabian Oil Company, known as Saudi Aramco.

The motive according to naysayers is the Saudi backlash in response to falling North American producers of shale oil. Over the past five years, domestic shale oil production which grew by leaps and bounds drastically reduced our dependence on oil imports. However, to sustain such growth, substantial investment was needed regularly which in the current environment was difficult to come up with. As a result, a slew of domestic E&P players cut back capex and reduced production to sustain amid crude volatility. This is now helping Saudi which is all set to reap benefits of this low-point of supply to its maximum.

Iran Strikes Back

With arch rival Saudi’s milking the Asian market how can Tehran just sit on the sidelines. Iran, in a counter move, is extending its ties with the largest Asian guzzler of crude, China. Historically, Iran was the third-largest exporter to China, but the country cut back its imports from Iran in 2012 in order to maintain diplomatic ties with the U.S. and Europe following the imposition of sanctions.

Per media reports, this week itself representatives of the state-run National Iranian Oil Company are progressing with their negotiations with Chinese oil importer China Petroleum & Chemical Corp. (SNP - Analyst Report).

Is Big Oil Slated to Gain Big?

2015 started on an anguished note for companies in the oil sector. Lower realizations affected the bottom lines of players resulting in a distinct fall in stockholders’ wealth. The pain was more prominent for the oil-dominated upstream firms which turned out to be the biggest losers, with most of their profits being wiped off by the fall in oil price. The panic selling by investors – precipitated by increasing oversupply and snail’s pace of demand growth – spared neither big integrated oil companies nor focused on oil exploration and production companies.

However, with crude showing signs of recovery we witnessed a positive trend over the past week in quite a few energy behemoths that have significant presence in this oil uptick. The list includes publicly traded integrated majors like ConocoPhillips (COP - Analyst Report), Royal Dutch Shell plc (RDS-A - Analyst Report), Chevron Corporation (CVX - Analyst Report) and TOTAL S.A. (TOT - Analyst Report). Consequently, a large share of investors’ wealth is ready to get a push thanks mainly to volatile middle-eastern geo dynamics.TOT

While most of these may seem good news upfront, some of the energy companies already are having a gala time, making a quick buck. With the first-quarter results slated to come shortly, we remain optimistic about some earnings surprises in the energy space.

Making the Right Pick

The huge number of industry participants makes it difficult to shortlist stocks that have the potential to beat earnings. To make things easy, we looked for the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of posting a positive surprise in the upcoming announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Applying this strategy, we have found the following three stocks that are likely to stand out this earnings season:

3 Solid Earnings Plays
 
Headquartered in Tulsa, OK, WPX Energy Inc. (WPX) is a Zacks Rank #2 stock with an Earnings ESP of +100.00%. The company is steadily trimming its asset base by divesting non-core legacy assets and reallocating proceeds to its highest returning acreage. Also, WPX Energy stock increased nearly 15% over the past week.

This independent exploration and production company’s operations are focused on the acquisition and development of energy assets in the Piceance Basin, Bakken Shale, and San Juan Basin. Prior to its spin-off in Dec 2011, the company was the exploration and production branch of Williams Companies (WMB - Analyst Report).
 
– WPX Energy is slated to release first-quarter 2015 results on May 6.

Another stock to look out for this earnings season is Swift Energy Company (SFY), carrying a Zacks Rank #2. The company has an Earnings ESP of +7.35%. The company beat estimates in all the past four quarters and has an average positive surprise of 152.97%. Also, the stock gained nearly 22% over the past week.

Houston, TX, based Swift Energy Company, is an independent oil and gas exploration and production company. Properties and operations are primarily located in South Louisiana and South Texas. Founded in 1979, Swift grows its reserves through a combination of exploratory and development drilling and property acquisitions. Year-end 2014 proved reserves were 194 MMBoe and were 62% natural gas and 29% proved developed.

– Swift Energy is expected to report first-quarter 2015 results on May 7.

The final pick of our triad is another Zacks Rank #2 stock, Calumet Specialty Products Partners LP (CLMT). The company has an Earnings ESP of +80.77%. The partnership beat estimates in three of the past four quarters, with an average positive surprise of 315.73%. Also, the stock has gained nearly 13% year to date.

Based in Indianapolis, IN, the partnership is an independent, North American producer of specialty hydrocarbon and fuel products. It has facilities in the states of Louisiana, Wisconsin, Montana, Texas, and Pennsylvania and owns and leases additional blending/storage facilities throughout the U.S.

– Calumet Specialty Products is expected to report first-quarter 2015 results on May 6.

Bottom Line

Despite its volatile nature, the energy sector is experiencing slow-but-steady growth on the back of ever-increasing energy demand. According to the Energy Information Administration (EIA), which provides official energy statistics from the U.S. government, global oil demand will grow another 1.0 million barrels per day in 2015. So betting on good energy stocks should not disappoint in the long run. Moreover, an earnings beat should immediately translate into price appreciation for these stocks.