Macquarie Group Ltd (ASX:MQG) tips these oil stock winners and losers for profit season

Don’t be fooled into thinking that the reporting season will be smooth sailing for our oil and gas stocks even though the sector is better placed than most to deliver earnings growth.

The stubbornly high crude oil price, favourable exchange rate and generally upbeat fundamentals for the commodity’s supply and demand outlook are well known tailwinds that should support the sector even in the face of escalating global trade tensions.

These are some of the reasons why the energy sector is outperforming with a 0.4% rise while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.5% during lunch time trade.

But some of our best held stocks in the energy sector could come under pressure later this month when they hand in their earnings report cards, according to the analysts at Macquarie Group Ltd (ASX: MQG).

The broker is warning investors to “hold on” as the ride is going to get bumpy with many energy stocks likely to disappoint from higher costs or capital expenditure (capex).

The safest bet is Woodside Petroleum Limited (ASX: WPL), while the outlook isn’t quite as good for Oil Search Limited (ASX: OSH), Santos Ltd (ASX: STO) and Beach Energy Ltd (ASX: BPT), in Macquarie’s opinion.

The impact of the recent earthquake in Papua New Guinea (PNG) will likely cause disruptions for Oil Search and Santos with the broker predicting a “messy” result, which will make things harder for investors to read.

The issue for Beach Energy might be more serious with Macquarie downgrading the stock to “underperform”.

The broker noted that its earnings forecasts for the mid-tier producer are already ahead of consensus forecasts for FY18 but that Beach Energy needs even higher oil prices to justify its share price.

The Brent crude benchmark has jumped around 40% in the last year but prices have been stuck between US$70 and US$80 a barrel in the last four months.

Macquarie believes that Beach Energy will need to spend more on capex to sustain production volumes at its Lattice field and the news will be a negative surprise for the market.

However, not everyone agrees that Woodside is the best placed this month. Morgan Stanley estimates that there is a 70% to 80% chance the share price of Santos will rise over the next 60 days.

The catalyst is Santos’ strategy day on September 26 when management details its plans for the Cooper Basin and GLNG projects.

Morgan Stanley has an “overweight” recommendation on Santos with a price target of $7 a share.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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