Big oil companies, including Exxon Mobil, Helmerich & Payne and National Oilwell Varco, are trailing the oil-price recovery
Getty ImagesExxon Mobil has the lowest ratio of long-term debt to equity among companies in the S&P 500 energy sector. DMAMBMCMDMEMGPREVIEWZBZBRZDZDRZFZGZQZRZSZTZU
The recovery of oil prices looks to be “for real” this time, springing from a combination of stronger demand by developed economies and expected disruptions in supply from exporters including Iran and Venezuela.
Two data approaches shed light on ways that long-term investors can jump on the trend while limiting their chances of being burned.
FactSetThe S&P 500 energy sector hasn’t kept pace with the rally in oil prices.
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The first way is simple: Concentrate on oil refiners. We recently looked at the best-performing oil stocks of 2018 and saw that among S&P 500 (^GSPC) energy stocks, oil refiners were the most consistent performers through the oil bust and (partial) recovery cycle.
The second way is to consider oil companies that have the lowest leverage, or borrowings. We first took this approach during the doldrums of January 2016, when oil was nearing its bottom. At that time, we listed the 10 S&P 500 energy stocks with the lowest ratios of long-term debt to equity as of Sept. 30, 2015. The idea was that the companies with the lowest amount of long-term borrowings relative to equity would be better positioned than competitors, not only to survive but to be able to take advantage of market turmoil to scoop up assets or make acquisitions on the cheap.
We checked in with the group in early May 2017 and found that for the most part, the stocks were performing well.
Here’s another look at the original low-leverage list form Jan. 8, 2016, and how the companies have performed:
CompanyTickerIndustryTotal return -Jan. 8, 2017 - May 11, 2018Total return - 2018 through May 11Total return - 3 yearsTotal return - 5 yearsTotal return - 10 yearsHelmerich & Payne Inc.(XNYS:H)Contract Drilling61%8%5%34%49%National Oilwell Varco Inc.(NOV)Oilfield Services/ Equipment39%13%-16%-27%-32%Exxon Mobil Corp.(XOM)Integrated Oil19%-1%5%7%22%Chevron Corp.(CVX)Integrated Oil73%5%37%28%92%Occidental Petroleum Corp.(OXY)Oil & Gas Production49%6%14%10%25%Baker Hughes, a GE Co. Class A(BHGE)Oilfield Services/ Equipment31%13%-17%19%-25%Hess Corp.(HES)Oil & Gas Production51%25%-14%-11%-41%Marathon Oil Corp.(MRO)Oil & Gas Production110%17%-28%-36%-21%Valero Energy Corp.(VLO)Oil Refining/ Marketing84%26%118%245%262%Pioneer Natural Resources Co.(PXD) Oil & Gas Production75%17%32%48%202%Source: FactSet
The original list included the “old” Baker Hughes, which was combined with General Electric Co.’s oil and gas unit to form the awkwardly named Baker Hughes, A GE Co. (BHGE) in July 2017. The combined company is majority-controlled by General Electric.
Looking ahead, the low-leverage idea may still be a good one because interest rates are rising. Companies with lower levels of debt will feel less pain from rising interest expenses. They will also be better positioned to take shareholder-friendly actions, including raising dividends and buying back shares. Finally, lower leverage gives them more options if they are still looking to make (hopefully prudent) acquisitions.
So here are the 10 S&P 500 energy companies with the lowest ratios of long-term debt to equity, according to their latest filings:
CompanyTickerIndustryLong-term debt/ equityTotal return - 2018 through May 11Total return - 3 yearsTotal return - 5 yearsTotal return - 10 yearsExxon Mobil Corp.(XOM)Integrated Oil9.1%-1%5%7%22%Helmerich & Payne Inc.(HP)Contract Drilling9.9%8%5%34%49%National Oilwell Varco Inc.(NOV)Oilfield Services/Equipment16.1%13%-16%-27%-32%Pioneer Natural Resources Co.(PXD)Oil & Gas Production16.2%17%32%48%202%Chevron Corp.(CVX)Integrated Oil16.4%5%37%28%92%Concho Resources Inc.(CXO)Oil & Gas Production19.5%2%32%87%447%TechnipFMC PLV(FTI)Oilfield Services/Equipment21.9%3%N/AN/AN/ASchlumberger NV(SLB)Oilfield Services/Equipment24.6%6%-16%4%-19%EOG Resources Inc.(EOG)Oil & Gas Production26.1%9%31%82%81%Valero Energy Corp.(VLO) Oil Refining/Marketing26.2%26%118%245%262%Source: FactSet
You can click on the ticker for more about each company, including news, ratings, price ratios, estimates and financials.
It’s interesting to see that for Exxon Mobil Corp. (XOM), Helmerich & Payne Inc. (HP), Pioneer Natural Resources Co. (PXD), Chevron Corp. (CVX) and Valero Energy Co. (VLO), the levels of long-term debt to equity are even lower than they were when we first looked at these numbers in January 2016.
Baker Hughes,a GE Co. just missed making the new list with a ratio of long-term debt to equity of 29%.
Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.
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