It may seem like ancient history, but in January 2016, some investors with short memories had trouble believing the price of oil would rebound to $50 a barrel. At that time, we suggested that oil companies with low leverage would be well-positioned to ride out the storm.
Now it’s time to take another look at the group to see how well they have been performing.
Background
Here’s a five-year chart of continuous West Texas Intermediate crude oil CL1, -0.06% price quotes through Sept. 26:
FactSet
West Texas Intermediate crude oil (WTI) bottomed at $26.05 on Feb. 11, 2016.
• In January 2016, Bill Mann, then Motley Fool’s chief investment officer, suggested in an interview that oil services and equipment companies, especially those with strong balance sheets, “had been thrown out with the bath water,” as the sharp decline in oil prices had caused shares of oil drillers and producers to plunge. Taking his idea further, we listed the 10 S&P 500 energy companies of all types with the lowest debt-to-equity ratios at that time. Mann made his comments on Jan. 8, 2016, and we listed the shares of those companies with returns through that date, when WTI closed at $33.16.
• On March 9, 2016, we published our first update, showing decent or better two-month returns for eight of the 10 oil stocks through March 8, 2016. WTI had risen to $36.50, up 10% from Jan. 8, 2016, while the S&P 500 energy sector returned 7% with dividends reinvested.
• On May 5, 2017, we published our second update, showing double-digit gains for eight of the 10 low-leverage oil companies, with gains of more than 30% for five of them. WTI had risen 44% from Jan. 8, 2016, to $47.82 as of May 3, 2017, while the S&P 500 energy sector was up 23%.
• On May 14, 2018, we discussed two ways of selecting oil stocks, while also providing our third update, which showed significant gains for all 10 companies we identified in January 2018, with six showing gains of more than 50% through May 11, 2018, and nine with gains of more than 30%. From Jan. 8, 2016, through May 11, 2018, WTI had increased 213% to $70.70, while the S&P 500 energy sector returned 45%.
Going back to the chart above, keep in mind that before the decline that began in July 2014, WTI had been trading around $100 for more than three years.
Looking ahead, in his daily energy report on Sept. 26, Phil Flynn, an energy market analyst with Price Futures Group, said there were many bullish signals for oil, because “OPEC has little or no spare capacity” and because “Venezuela’s pilfered energy industry will continue to collapse.” He also pointed to “SUV sales going through the roof” to support his confidence in continued high demand for gasoline in the U.S. He expects WTI to rise to $84 by the end of the year.
Latest update
Here’s the list of 10 low-leverage oil companies we identified in January 2016, with returns from then, as well as year-to-date and from our last update as of May 11:
The original list included the pre-merger Baker Hughes, which was combined with General Electric’s GE, +2.90% oil and gas unit to form Baker Hughes, a GE Co. BHGE, +0.56% The combined company is majority-controlled by General Electric, which plans to fully divest the unit over the next two or three years.
Company Ticker Industry Total return - Jan. 8, 2016, through Sept. 26, 2018 Total return - 2018, through Sept. 26, 2018 Total return - May 11, 2018, through Sept. 26, 2018 Marathon Oil Corp. MRO, +0.96% Oil and Gas Production 126% 34% 7% Valero Energy Corp. VLO, -0.42% Oil Refining/Marketing 90% 30% 3% Hess Corp. HES, +1.62% Oil and Gas Production 71% 50% 13% Chevron Corp. CVX, +0.55% Integrated Oil 66% 0% -4% Helmerich & Payne Inc. HP, +0.77% Contract Drilling 63% 9% 2% Pioneer Natural Resources Co. PXD, -0.19% Oil and Gas Production 50% 1% -14% National Oilwell Varco Inc. NOV, +0.79% Oilfield Services/Equipment 48% 20% 6% Occidental Petroleum Corp. OXY, +0.04% Oil and Gas Production 45% 13% -3% Exxon Mobil Corp. XOM, +0.57% Integrated Oil 27% 6% 7% Baker Hughes, a GE Co. Class A BHGE, +0.56% Oilfield Services/Equipment 25% 9% -4% West Texas crude oil 216% 18% 1% S&P 500 energy sector 46% 8% 1% Source: FactSet
All but three of the companies have outperformed the S&P 500 energy sector since Jan, 8, 2016.
The industry is expected to continue increasing its earnings significantly, in part because of its long-term focus on improving efficiency. In its Commodity Markets Outlook in October 2017, the World Bank said average costs for U.S. shale producers had fallen to less than $40 a barrel from more than $70 “before the price collapse” in 2014. So even modest oil-price increases from here may well support considerably higher stock prices for the group over the long term.
Here are earnings projections for the group based on consensus estimates from analysts polled by FactSet:
Company Ticker Consensus EPS estimate - 2018 Consensus EPS estimate - 2019 Consensus EPS estimate - 2020 Projected earnings increase - 2019 Projected earnings increase - 2020 Marathon Oil Corp. MRO, +0.96% $0.75 $1.19 $1.42 58% 19% Valero Energy Corp. VLO, -0.42% $6.59 $10.46 $13.76 59% 31% Hess Corp. HES, +1.62% -$0.41 $0.99 $2.48 N/A 152% Chevron Corp. CVX, +0.55% $7.81 $9.03 $8.92 16% -1% Helmerich & Payne Inc. HP, +0.77% $0.11 $1.14 $2.33 967% 104% Pioneer Natural Resources Co. PXD, -0.19% $6.74 $10.96 $13.64 63% 24% National Oilwell Varco Inc. NOV, +0.79% $0.14 $1.00 $1.83 620% 84% Occidental Petroleum Corp. OXY, +0.04% $5.01 $5.69 $4.89 14% -14% Exxon Mobil Corp. XOM, +0.57% $4.67 $5.63 $6.02 21% 7% Baker Hughes, a GE Co. Class A BHGE, +0.56% $0.72 $1.49 $2.24 107% 50% Source: FactSet
Higher earnings generally support rising stock prices over the long term. With lower costs and stable prices, analysts expect plenty of support for higher stocks prices for this group.
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