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With the recent U.S. interest rate hike and current tensions between the United States and Saudi Arabia, investors are concerned about what all this means for oil prices and the U.S. economy. Crude prices are a lead driver of all economies and it is crucial to understand the effect rising prices could have on various sectors. Today, we focus on a sector with a lack of correlation to other sectors – the energy sector itself.

The screen

We screen the S&P 500 energy sector, which comprises 30 companies, for firms whose profit gains are supported by healthy fundamentals. Criteria include:

  • A 12-month change in current operating value equal to or greater than zero. Current operating value represents the real profits of the company and is calculated by the net operating profit after tax (NOPAT) divided by the cost of capital – this allows us to better compare companies with varying costs and of different sizes;
  • 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;
  • Rising earnings per share over a 12-month period;
  • Future growth value/market value (FGV/MV) between minus 50 and 50, 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.

For informational purposes, we have also included recent stock price, dividend yield, one-year return (as of last month’s end) and the economic performance index (EPI – a ratio of return on capital to cost of capital, representing the wealth-creating ability of the company).

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

A couple on the list stand out. At the end of last week, refinery company Valero Energy Corp. announced it was buying back Valero Energy Partners LP – a master limited partnership – in an expected US$950-million transaction. This move surprised many investors since the MLP structure has benefited many of the other players in the industry. On the other hand, by analyzing the results in our screen, Valero Energy Corp. has been doing quite well fundamentally. It is trading at a slight discount, as indicated by its FGV/MV; current operating value has risen nicely; and its economic performance index (EPI) is greater than one, indicating wealth creation for shareholders.

Phillips 66 Co., a spinoff of exploration and production giant ConocoPhillips (which also made our list), is a multinational that processes, transports, stores and markets fuels and products. From our screen, we notice the EPI of Phillips 66 is second-highest on the list, as is the change in current operating value. This shows improved performance and that the company is successfully covering the costs of raising its invested capital.

Readers are advised to conduct further research before investing in any of the securities shown below.

Select U.S.-listed energy companies

Company Ticker Market Cap. (US$Bil) Recent Price (US$/Shr) FGV on MV (%) EPI 1Yr COV Chg (%) 1Yr NOPAT Chg (%) 1Yr Price Return (%) 1Yr EPS Chg ($) Div. Yield (%)
Chevron Corp. CVX-N 301.6 118.14 43.22 0.34 0.0 2.41 4.07 3.29 2.1
ConocoPhillips COP-N 116.1 72.49 44.82 0.07 4.3 5.12 54.65 7.00 6.8
Phillips 66 PSX-N 63.2 102.77 36.78 0.93 81.6 6.79 23.04 8.46 12.0
Williams Companies Inc. WMB-N 54.1 26.74 3.54 0.80 52.8 4.05 -9.4 1.82 28.0
Valero Energy Corp. VLO-N 53.6 92.76 -3.57 1.30 69.1 5.28 47.86 6.36 15.4
Baker Hughes BHGE-N 46.8 29.94 -39.94 0.35 0.0 2.75 -7.62 2.64 4.4
EQT Corp. EQT-N 29.3 46.38 20.95 0.58 82.2 6.32 -32.2 0.03 0.0
Apache Corp. APA-N 28.8 42.1 -10.51 0.25 0.0 2.62 4.08 2.18 0.0
Marathon Oil Corp. MRO-N 25.3 20.67 43.08 0.08 0.0 6.24 71.68 1.88 0.0
National Oilwell Varco Inc. NOV-N 18.9 40.4 2.44 0.18 0.0 7.21 20.57 5.82 0.0
Cimarex Energy Co. XEC-N 10.5 91.65 28.88 0.45 1.2 3.1 -18.24 3.31 50.0
Helmerich & Payne Inc. HP-N 7.9 66.15 41.52 0.83 0.0 7.86 31.97 5.94 0.4
Newfield Exploration Co. NFX-N 7.5 23.62 13.07 0.39 0.9 5.07 -2.83 0.40 0.0

Source: Inovestor

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