Whole New Ballgame for Energy
After 18 months of dismal performance, energy stocks finally broke out in the first half of 2016. Year-to-date, the Energy Select Sector SPDR ETF (NYSE: XLE) lags only the Utilities SPDR ETF (NYSE: XLU):
Source: Select Sector SPDR ETFs
However, energy stocks were down sharply during the first two weeks of this year, so looking at performance over the past six months (essentially starting the third week of January), the XLE is up by 27.4%, all but tied with the Materials SPDR ETF (NYSE: XLB) at 27.5%. And if we look at the most recent three month-period, the XLE tops all the other sector funds with a return of 9%.
Most analysts weren’t forecasting such improved performance for energy stocks just yet. In fact, the fundamentals aren’t extremely bullish for oil or gas, but it seems increasingly clear that they are likely to turn that way in the not-too-distant future.
In fact, just last week Citibank released a report that echoed the thinking I have frequently shared in this space to the effect that an oil price below $40 per barrel is unsustainable. “The oil market is treading water for now, but the oil price overshot to the downside earlier this year and this is clearly setting the stage for a bullish end to the decade,” noted Citi’s analyst.
In last week’s monthly web chat for subscribers of The Energy Strategist and MLP Profits, someone asked whether it is safe to start looking at the oil producers once again. So I provided an update for subscribers of some important performance metrics for the 30 largest oil and gas companies in the U.S., along with some guidance identifying the stocks that still look attractive after this year’s big gains. Here are some metrics for the 10 largest pure oil and gas producers in the U.S.:
- EV – Enterprise Value in billions of U.S. dollars as of July 15
- EBITDA – Earnings before interest, tax, depreciation and amortization, in billions for the trailing twelve months (TTM)
- FQ – Fiscal quarter
- Debt – Net debt at the end of the most recent fiscal quarter
- FCF – Levered free cash flow in billions
- YTD Ret – Total shareholder return (TSR), including dividends, thus far in 2016
The average EV for this group is $36 billion, and with the exception of ConocoPhillips all of these stocks have solid returns year-to-date. Even after a 30% YTD rise, Apache still looks like the most attractively-priced company on the list with a low EV/EBITDA multiple, relatively low debt, and positive free cash flow (FCF) for the past year. Concho Resources (NYSE: CXO) and Hess (NYSE: HES) are also attractively priced. On the more expensive side, Anadarko Petroleum (NYSE: APC) and Noble Energy (NYSE: NBL) both have high EV and debt multiples.
Of course there is much more to evaluating a company than just looking at the multiples. Some other important considerations are the production mix between oil and gas, the geography and geology of lease holdings, and whether a company has been investing heavily into projects that will soon pay off. I would definitely avoid those that have high EV or debt multiples, as well as those that consistently have difficulty generating positive free cash flow.
To see more in-depth analysis of the energy sector, please consider subscribing to The Energy Strategist. Many of the top YTD performers are in our various portfolios, which you can access as a subscriber.