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Searching for the best value energy stocks, I decided to rank all the energy stocks, which are traded in U.S. markets, by the sum of their dividend and earnings yield.

Definition of Earnings Yield by Investopedia:

The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations.

I used the Portfolio123's powerful ranking system to grade all energy stocks based on this theme. Only stocks with a market cap greater than $100 million and price greater than 1.00 were taken into account. All the data for this article were taken from Portfolio123.

The ranking system that I built searched for the best 20 energy stocks by the sum of their dividend and earnings yield. For the earnings yield, I used the average of the inverse of the trailing P/E ratio and the inverse of the forward P/E ratio.

After running the ranking system on July 03, 2013, before the market open, I discovered the following twenty stocks:

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The table below presents the trailing earnings yield, the forward earnings yield, the average earnings yield, the dividend yield and the sum of the average earnings yield and the dividend yield for the twenty companies.

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Golar LNG Ltd (NASDAQ:GLNG)

Golar LNG Limited, a midstream liquefied natural gas (LNG) company, engages in the transportation, regasification and liquefaction, and trading of LNG. Golar LNG Limited was founded in 1946 and is headquartered in Hamilton, Bermuda.

On May 30, Golar LNG reported its first-quarter 2013 financial results. EPS came in at $1.06, much better than the average analyst expectations of $0.30 per share. GAAP EPS of $1.06 for Q1 were 458% higher than the prior-year quarter's $0.19 per share. GLNG reported revenue of $35.1 million, sales were 58% lower than the prior-year quarter's $83.1 million. Analysts expected to see sales of $98.8 million.

VOC Energy Trust (NYSE:VOC)

VOC Energy Trust acquires and holds a term net profits interest of the net proceeds from production of the interests in oil and natural gas properties in the states of Kansas and Texas. The company was founded in 2010 and is based in Austin, Texas.

VOC will report its latest quarterly financial results in July. VOC is expected to post a profit of $0.51 a share, a 15% decline from the company's actual earnings for the same quarter a year ago. The reported results will probably affect the stock price in the short term.

Equal Energy Ltd (NYSE:EQU)

Equal Energy Ltd. engages in the acquisition, exploration, development, and production of petroleum and natural gas properties in Canada. The company was founded in 1998 and is headquartered in Calgary, Canada.

EQU will report its latest quarterly financial results in July. EQU is expected to post a loss of $0.11 a share, the company had a profit of $0.19 a share at the same quarter a year ago.

Petrobras Argentina SA (NYSE:PZE)

Petrobras Argentina S.A. operates as an integrated energy company. The company's Oil and Gas Exploration and Production segment engages in the oil and gas exploration and production activities primarily in Argentina, Bolivia, Ecuador, and Venezuela. The company was founded in 1946 and is based in Buenos Aires, Argentina. Petrobras Argentina S.A. is a subsidiary of Petrobras Participaciones S.L.

Ship Finance International Ltd (NYSE:SFL)

Ship Finance International Limited, through its subsidiaries, engages in the ownership and operation of vessels and offshore related assets in Bermuda, Cyprus, Malta, Liberia, Norway, Singapore, the United Kingdom, and the Marshall Islands. Ship Finance International Limited was founded in 2003 and is based in Hamilton, Bermuda.

Inergy LP (NRGY)

Inergy, L.P., an integrated energy midstream master limited partnership, engages in the storage and transportation of natural gas and natural gas liquids (NGL) in the United States and Canada. Inergy, L.P. is headquartered in Kansas City, Missouri.

NRGY will report its latest quarterly financial results on July 29. NRGY is expected to post a profit of $0.04 a share, the company had a loss of $0.15 a share at the same quarter a year ago.

BP PLC (NYSE:BP)

BP p.l.c. provides fuel for transportation, energy for heat and light, lubricants to engines, and petrochemical products. The company was founded in 1889 and is headquartered in London, the United Kingdom.

BP will report its latest quarterly financial results in July. BP is expected to post a profit of $1.20 a share, a 4% rise from the company's actual earnings for the same quarter a year ago.

HollyFrontier Corp. (NYSE:HFC)

HollyFrontier Corporation operates as an independent petroleum refiner and marketer in the United States. HollyFrontier Corporation was founded in 1947 and is based in Dallas, Texas.

HFC will report its latest quarterly financial results on August 06. HFC is expected to post a profit of $1.62 a share, a 32% decline from the company's actual earnings for the same quarter a year ago.

Rhino Resource Partners LP (NYSE:RNO)

Rhino Resource Partners LP, together with its subsidiaries, produces, processes, and sells various grades of steam and metallurgical coal from surface and underground mines in the United States. The company was founded in 2003 and is based in Lexington, Kentucky.

RNO will report its latest quarterly financial results in July. RNO is expected to post a profit of $0.10 a share, a 78% decline from the company's actual earnings for the same quarter a year ago.

Natural Resource Partners LP (NYSE:NRP)

Natural Resource Partners L.P., through its subsidiaries, engages in the ownership, management, and leasing of mineral properties in the United States. Natural Resource Partners L.P. was founded in 2002 and is headquartered in Houston, Texas.

NRP will report its latest quarterly financial results on August 06. NRP is expected to post a profit of $0.41 a share, an 11% decline from the company's actual earnings for the same quarter a year ago.

Back-testing

In order to find out how a portfolio based on this ranking system would have performed during the last year, last 5 years and last 14 years, I ran the back-tests, which are available through the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

One year back-test

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Five years back-test

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Fourteen years back-test

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Summary

The best energy stocks in terms of the sum of dividend and earnings yield has given much better returns during the last year, the last five years, and the last 14 years than the S&P 500 benchmark. The Sharpe Ratio, which measures the ratio of reward to risk, was also much better in all three tests. The one-year return of the screen was 21.32% while the return of the S&P 500 during the same period was 18.22%. The difference between the best energy stocks screen to the S&P 500 benchmark was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 21.08% while the average annual return of the S&P 500 index during the same period was only 1.90%. Although this ranking system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: Ranking Energy Stocks By Dividend And Earnings Yield