Week 103 - Oil & Gas Producers in the 2013 Barron's 500 Index

Situation: Energy companies are currently in a slack period. Production is up due to improvements in extraction methods, while demand is down because of recession in Europe combined with sub-par growth elsewhere.

When we look at energy companies that have a) outperformed the S&P 500 Index since it peaked in inflation-adjusted terms on 3/24/2000, and b) lost less than 65% as much as that index during the Lehman Panic, we come up with 8 tickers (see Table): OXY, EOG, IMO, HES, CVX, APC, XOM and APA. In other words, those 8 companies meet our standard for long-term Finance Value. However, none meet our standard for recent finance value which is to have risen in Barron's 500 rank in the most recent year (2012). That means all 8 scored lower with respect to sales and/or 1-3 yr cash flow in 2012 than in 2011 (Table). Two of the companies (XOM & CVX) issue A-rated stocks and bonds per S&P and score well on tests (see Week 30) for Durable Competitive Advantage (Col J) and Buffett Buy Analysis (Col K).

Bottom Line: Oil and gas production will keep growing 1%/yr for decades. Companies in that business face growing challenges because the “low-hanging fruit” is gone and environmental concerns are growing. Drillers increasingly have to operate in hostile climates, the deep ocean, or both (Arctic Ocean). Governments used to subsidize exploration & production, and overlook the need for environmental protection, but those days are gone. Pipelines are the most efficient and safe way to move petroleum products on land, but railroads are preferred by the public. That choice drives up both costs and risks, which only adds to the price of fuel. The danger, for this century, isn’t that we’ll run out of petroleum products. It’s that we’ll no longer be able to afford them. Solar panels and wind farms will be sprouting everywhere possible. If you’re saving for retirement, electric utilities and railroads are a better way to invest in the energy infrastructure than oil companies.

Risk Rating: 8.

Full Disclosure: I own stock in OXY, CVX, and XOM.