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number cruncher

Noor Hussain is an analyst and account executive for Inovestor Inc.

What are we looking for?

Market speculation around production cuts by the Organization of Petroleum Exporting Countries and the impact of U.S. sanctions against Iran and Venezuela have been among the factors driving recent oil-price volatility. Today, we will identify U.S. energy companies whose healthy operations and strong fundamentals make them solid bets to withstand the heightened unpredictability.

The screen

We screen the S&P 500 energy sector for quality companies by using the following criteria:

  • Market capitalization greater than US$5-billion;
  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a greater pace than the cost of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax (NOPAT) minus capital expenses;
  • A positive change in the 12-month NOPAT – a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • Future growth value/market value (FGV/MV) between minus 50 per cent and 50 per cent, to exclude companies with exaggerated discounts or premiums. FGV/MV represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.
  • Economic performance index (EPI), which is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. Anything above one is favourable; the higher the figure the better.

For informational purposes, we have also included recent stock price, dividend yield and one-year price return. Please note that some ratios shown are based on an end-of-quarter reporting.

More about Inovestor

Inovestor for Advisors is a research platform based on fundamental analysis specializing in the economic value-added (EVA) method. It helps advisers quickly identify attractive investment opportunities and easily communicate them to their clients through client-friendly reports. In addition, Inovestor allows investors to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

Houston-based Occidental Petroleum Corp., the exploration and production company that recently launched a counteroffer to Chevron Corp.'s buyout deal for Anadarko Petroleum Corp., shows the largest 12-month change in NOPAT at 4.7 per cent. Occidental also has an attractive dividend yield of more than 5 per cent and, like many on our list, is generating solid free cash flow.

Dallas-based HollyFrontier Corp., a refiner and distributor, is the only company on our list trading at a discount, as indicated by FGV/MV ratio of minus 35.5 per cent – even though its stock has dropped by almost 30 per cent in the past 12 months. Hollyfrontier’s free cash flow is attractive, the highest on our list at 8.8 per cent. In addition, return on capital is efficiently covering the costs of capital, as shown by an EPI of 1.5.

Investors are advised to do further research before investing in any of the companies listed here.

Select U.S.-listed energy stocks

CompanyTickerMarket Cap. (US$Mil)Recent Price (US$)EVA Chg. 12M (%)NOPAT Chg. 12M (%)FGV on MV (%)EPIFCF/Capital (%)TTM Div. Yield (%)
Chevron Corp.CVX-N 223,367.2 117.2764.70.642.
ConocoPhillipsCOP-N 70,082.2 62.01372.
Schlumberger SLB-N 57,177.8 41.28196.51.832.
Kinder Morgan Inc.KMI-N 44,185.1 19.53256.12.722.
Occidental Petroleum Corp.OXY-N 43,427.1 57.95425.04.710.
Marathon Petroleum Corp.MPC-N 40,772.8 59.9661.
Halliburton Co.HAL-N 24,215.4 27.77398.83.534.20.7-0.12.6
Diamondback Energy Inc.FANG-Q 16,504.6 100.4796.51.333.71.3-1.30.5
Cabot Oil & Gas Corp.COG-N 10,740.8 25.3755.90.339.
HollyFrontier Corp.HFC-N 7,981.6 46.74113.11.4-
Cimarex Energy Co.XEC-N 6,399.4 66.83379.

Source: Inovestor for Advisors

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 24/04/24 2:18pm EDT.

SymbolName% changeLast
Chevron Corp
Schlumberger N.V.
Kinder Morgan
Occidental Petroleum Corp
Marathon Petroleum Corp
Halliburton Company
Diamondback Energy

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