Persistent crude weakness had affected the balance sheet of oil exploration and production companies in 2015, resulting in high debts and low cash balance. Following this, a number of energy players had stopped dividend payments.
However, the tide seems to have turned in favor of oil explorers, with many generating solid cash flow.
In this article, we have picked five oil stocks that can make great additions to your portfolio now.
Crude Weakness Since Mid-2014
The commodity’s price has been in a freefall, primarily due to supply glut in the global market, since mid-2014.
During 1990 and early 2000s, the United States was more dependent on crude import as domestic demand was way above the conventional oil supply. But with the invention of new techniques like hydraulic fracturing and horizontal drilling, U.S. shale producers ramped up oil production relentlessly. Eventually, owing to the huge scale of crude output, the United States started relying less on oil import.
The shale boom turned the nation into an oil-surplus economy from a crude-deficit one. Along with the United States, the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – also pumped up more crude. All these events led to a global oversupply of the commodity, pushed oil to multi-year lows. The West Texas Intermediate (WTI) oil price chart given below reflects how crude has been drastically losing ground since mid-2014.
Data Source- Energy Information Administration (EIA)
Explorers Hit the Most
The companies in the crude exploration and production industry got affected by the oil slump as they sell the commodity.
S&P 500 Comparison
If we compare the price performance of the industry with the S&P 500 index, the picture of how crude affected the upstream players is clear. Below is the snapshot that shows that the industry has significantly underperformed the S&P 500 index over the last three years. In other words, over the aforesaid period, the industry lost 61.1% as against the 21.7% improvement of the index.
In the wake of the unfavorable business environment, cash generation from core operations declined significantly. Hence, to maintain the upstream business, these companies heavily relied on debt capital which resulted in higher debts. Our proprietary model shows that from $4,852 million during the beginning of 2014, long-term debt jumped to $5,015 million.
Free Cash Flow
Cash flow started to form the declining trajectory during entire 2014. From January 2015 to December 2015, cash flow plunged and entered the negative territory.
Explorers Regain Health
2015 was a nightmare for energy explorers as the WTI crude price chart shows a steep fall in oil prices until the multi-year lows the commodity reached during mid-February 2016. From the 12-year low of $26.21 a barrel, black gold has bounced back to $48.51, which is near the $50 mark. The higher oil prices helped the U.S. energy companies generate more cash flow.
Our data shows that over the 2015-2016 period, capital spending from explorers slipped below $600 million from slightly over $2,400 million.
Lower spending for exploration by the U.S. energy players along with the decision of OPEC and 11 non-OPEC players, including Russia, in the Vienna meeting on May 25, to extend the production cut deal until March 2018 helped fight the supply glut.
Balance Sheet & Free Cash Flow
Since 2016, long-term debt load for the crude exploration and production industry fell from more than $5,000 million to below $4,200 million.
Over the same time period, free cash flow entered the positive territory.
Oil Stocks in Focus
Given the renewed strength in crude, we think it will be prudent for investors to consider a few oil stocks.
These stocks have a favorable VGM Score. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.
5 Stocks to Consider
Based in Denver, CO, Whiting Petroleum Corp. (WLL - Free Report) explores oil and gas reserves in the U.S. Rocky Mountains.
With a Zacks Rank #3 (Hold) and a VGM Score of B, the company is likely to witness year-over-year earnings growth of 65.37% in 2017.
Comstock Resources, Inc. (CRK - Free Report) - headquartered in Frisco, TX - is an oil and gas exploration and production company engaged in exploitation activities of crude resources.
The company has VGM Score of A and a Zacks Rank #3. We expect Comstock to report 65.8% improvement in 2017 earnings.
Based in Fort Worth, TX, Range Resources Corp. (RRC - Free Report) is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the United States.
The company has a VGM Score of B and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Abraxas Petroleum Corp. (AXAS - Free Report) - headquartered in San Antonio, TX - is an oil and gas explorer in the prospective U.S. resource plays.
With a Zacks Rank #3 and a VGM Score of B, we expect Abraxas Petroleum to witness 303.57% improvement in 2017 earnings.
Rice Energy Inc. - based in Canonsburg, PA - explores and produces oil in the U.S Appalachian Basin.
The Zacks Rank #3 firm has a VGM Score of B. On top of that, we expect Rice Energy to witness 63.06% improvement in 2017 earnings.
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