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The recovery of oil prices looks to be “for real” this time, springing from a combination of stronger demand by developed economies and expected disruptions in supply from exporters including Iran and Venezuela.
Two data approaches shed light on ways that long-term investors can jump on the trend while limiting their chances of being burned.
FactSet
The first way is simple: Concentrate on oil refiners. We recently looked at the best-performing oil stocks of 2018 and saw that among S&P 500 energy stocks, oil refiners were the most consistent performers through the oil bust and (partial) recovery cycle.
The second way is to consider oil companies that have the lowest leverage, or borrowings. We first took this approach during the doldrums of January 2016, when oil was nearing its bottom. At that time, we listed the 10 S&P 500 energy stocks with the lowest ratios of long-term debt to equity as of Sept. 30, 2015. The idea was that the companies with the lowest amount of long-term borrowings relative to equity would be better positioned than competitors, not only to survive but to be able to take advantage of market turmoil to scoop up assets or make acquisitions on the cheap.
We checked in with the group in early May 2017 and found that for the most part, the stocks were performing well.
Here’s another look at the original low-leverage list form Jan. 8, 2016, and how the companies have performed:
| Company | Ticker | Industry | Total return -Jan. 8, 2017 - May 11, 2018 | Total return - 2018 through May 11 | Total return - 3 years | Total return - 5 years | Total return - 10 years |
| Helmerich & Payne Inc. | Contract Drilling | 61% | 8% | 5% | 34% | 49% | |
| National Oilwell Varco Inc. | Oilfield Services/ Equipment | 39% | 13% | -16% | -27% | -32% | |
| Exxon Mobil Corp. | Integrated Oil | 19% | -1% | 5% | 7% | 22% | |
| Chevron Corp. | Integrated Oil | 73% | 5% | 37% | 28% | 92% | |
| Occidental Petroleum Corp. | Oil & Gas Production | 49% | 6% | 14% | 10% | 25% | |
| Baker Hughes, a GE Co. Class A | Oilfield Services/ Equipment | 31% | 13% | -17% | 19% | -25% | |
| Hess Corp. | Oil & Gas Production | 51% | 25% | -14% | -11% | -41% | |
| Marathon Oil Corp. | Oil & Gas Production | 110% | 17% | -28% | -36% | -21% | |
| Valero Energy Corp. | Oil Refining/ Marketing | 84% | 26% | 118% | 245% | 262% | |
| Pioneer Natural Resources Co. | Oil & Gas Production | 75% | 17% | 32% | 48% | 202% | |
| Source: FactSet | |||||||
The original list included the “old” Baker Hughes, which was combined with General Electric Co.’s oil and gas unit to form the awkwardly named Baker Hughes, A GE Co. in July 2017. The combined company is majority-controlled by General Electric.
Looking ahead, the low-leverage idea may still be a good one because interest rates are rising. Companies with lower levels of debt will feel less pain from rising interest expenses. They will also be better positioned to take shareholder-friendly actions, including raising dividends and buying back shares. Finally, lower leverage gives them more options if they are still looking to make (hopefully prudent) acquisitions.
So here are the 10 S&P 500 energy companies with the lowest ratios of long-term debt to equity, according to their latest filings:
| Company | Ticker | Industry | Long-term debt/ equity | Total return - 2018 through May 11 | Total return - 3 years | Total return - 5 years | Total return - 10 years |
| Exxon Mobil Corp. | Integrated Oil | 9.1% | -1% | 5% | 7% | 22% | |
| Helmerich & Payne Inc. | Contract Drilling | 9.9% | 8% | 5% | 34% | 49% | |
| National Oilwell Varco Inc. | Oilfield Services/Equipment | 16.1% | 13% | -16% | -27% | -32% | |
| Pioneer Natural Resources Co. | Oil & Gas Production | 16.2% | 17% | 32% | 48% | 202% | |
| Chevron Corp. | Integrated Oil | 16.4% | 5% | 37% | 28% | 92% | |
| Concho Resources Inc. | Oil & Gas Production | 19.5% | 2% | 32% | 87% | 447% | |
| TechnipFMC PLV | Oilfield Services/Equipment | 21.9% | 3% | N/A | N/A | N/A | |
| Schlumberger NV | Oilfield Services/Equipment | 24.6% | 6% | -16% | 4% | -19% | |
| EOG Resources Inc. | Oil & Gas Production | 26.1% | 9% | 31% | 82% | 81% | |
| Valero Energy Corp. | Oil Refining/Marketing | 26.2% | 26% | 118% | 245% | 262% | |
| Source: FactSet | |||||||
You can click on the ticker for more about each company, including news, ratings, price ratios, estimates and financials.
It’s interesting to see that for Exxon Mobil Corp. Helmerich & Payne Inc. Pioneer Natural Resources Co. Chevron Corp. and Valero Energy Co. the levels of long-term debt to equity are even lower than they were when we first looked at these numbers in January 2016.
Baker Hughes,a GE Co. just missed making the new list with a ratio of long-term debt to equity of 29%.