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What are we looking for?

Oil companies that will benefit from a rising oil price, without exposing investors to the downside risks of financial distress.

The screen

Back in February, crude oil traded as low as $26.05 (U.S.) a barrel – its lowest point in more than a decade. Opportunistic investors were wondering whether the bottom had been hit. The price is now more than $43 and many investors are looking for oil companies that will benefit if the oil price continues to rise.

On the other hand, we have a seen a lot of oil companies that borrowed excessively to finance expansion over the past few years when crude was trading at more than $100. As a result they've been saddled with large debt loads, and many are struggling to make their interest payments. Goodrich Petroleum in Houston filed for bankruptcy protection last week, citing liabilities that were 10 times the size of the company's assets.

So how do we capture the upside of a potentially rising oil price while avoiding the downside associated with excessive debt?

  • First, we look for North American oil and gas companies with a market cap of at least $300-million, with a net income (before taxes) of at least $50-million.
  • Second, to filter out companies such as Goodrich, we look for companies whose total debt is no more than 50 per cent of total assets.
  • Finally, we look for companies whose EBITDA (earnings before interest, taxes, depreciation and amortization) is significantly higher than their interest expense. This is a sign that they will comfortably be able to pay their interest bill. If we look for an EBITDA/interest expense ratio of at least 15, this narrows our list considerably.

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What did we find?

Our screen yields only 10 companies – eight headquartered in the United States and two (Peyto Exploration and Tourmaline Oil) from Canada. The list includes blue-chip names such as Exxon Mobil, the world's fourth-largest company (by market cap), and lesser known, but very promising, companies such as Tourmaline of Calgary, and TravelCenters of America in Westlake, Ohio.

Tourmaline is focused on intermediate crude oil and natural gas exploration and production in Alberta. It has become the largest producer in the Alberta Deep Basin in just seven years of operation and pays one of the lowest interest rates on current corporate debt, 2.69 per cent, in the North American energy sector (not shown).

TravelCenters, on the other hand, operates and franchises a network of gas station/convenience roadside stops in 43 states and Ontario. If oil prices do in fact rise, this will improve the margin it receives on fuel. It has also been very aggressively expanding its distribution network with acquisitions totalling more than $700-million since 2011.

This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.

Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.

Oil companies that could benefit from a rising oil price

CompanyTicker Market Cap (C$-mil) Net Income Before Taxes (C$-mil) Total Debt/ Total Assets %EBITDA/ Interest ExpenseIndustry
Exxon Mobil Corp.XOM-N460,19130,39911.5%99.5Oil & Gas Refining and Marketing
HollyFrontier Corp.HFC-N8,1021,67312.4%39.5Oil & Gas Refining and Marketing
Marathon Petroleum Corp.MPC-N27,7966,05327.7%23.3Oil & Gas Refining and Marketing
Peyto Exploration & Dev. Corp.PEY-T5,20122431.1%16.6Oil & Gas Exploration and Production
Phillips 66PSX-N58,6498,36418.3%17.8Oil & Gas Refining and Marketing
Star Gas Partners LPSGU-N6259414.1%67.5Oil & Gas Refining and Marketing
Tesoro Corp.TSO-N13,0923,64024.9%17.7Oil & Gas Refining and Marketing
Tourmaline Oil Corp.TOU-T6,81816216.6%23.5Oil & Gas Exploration and Production
TravelCenters of America LLCTA-N3766121.5%21.0Oil & Gas Refining and Marketing
Valero Energy Corp.VLO-N36,4458,26316.6%20.0Oil & Gas Refining and Marketing

Source: Thomson Reuters Eikon