What To Expect From EXCO Resources' (XCO) Q2 Earnings?

Independent natural gas producer EXCO Resources Inc. (NYSE:XCO) is set to release its second-quarter 2016 results after the closing bell on Tuesday, Aug 2.

In the preceding three-month period, the Dallas, TX-based upstream player delivered a positive earnings surprise of 36.36% despite the challenges that a steep drop in oil price tagged along. This was primarily owing to strong cost control measures.

As far as the earnings surprise history is concerned, the company has an excellent record: its beaten estimates in each of the last four quarters with an average beat of 35.43%.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Unlike the previous few quarters, second-quarter 2016 turned out to be a rather good one with natural gas advancing more than 49% sequentially – the best quarterly percentage gain in 11 years. Natural gas futures during the Apr–Jun 2016 period hovered mostly between $2 and $3 per million Btu (MMBtu). With the commodity comprising around 90% of EXCO Resources’ total production, the price improvement bodes well for the company.

Moreover, to a large extent, the company’s successful cost reduction initiatives are expected to cushion the results.

However, EXCO Resources’ core operational region – the Haynesville shale – has seen a drastic fall in the number of gas rigs employed. From 25 at 2015-end, the number is expected to hit single digits pretty soon. Production is likely to suffer in this case.

Earnings Whispers

Our proven model does not conclusively show that EXCO Resources will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is not the case here, as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at a loss of 7 cents.

Zacks Rank: EXCO Resources has a Zacks Rank #2. Though a Zacks Rank #2 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for EXCO Resources, here are some domestic upstream you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Legacy Reserves L.P. (NASDAQ:LGCY) has an Earnings ESP of +31.58% and a Zacks Rank #1. The company is expected to release earnings results on August 3.

EOG Resources Inc. (NYSE:EOG) has an Earnings ESP of +2.00% and a Zacks Rank #2. The company is anticipated to release earnings on August 4.

Devon Energy Corp. (NYSE:DVN) has an Earnings ESP of +4.55% and a Zacks Rank #2. The company is likely to release earnings on August 2.