We focused on three oil-related industries in the energy sector: oil & gas operations, integrated oil & gas, and oil well services & equipment. Over the last month, oil & gas operations companies have, on average, lost nearly 11 percent, while integrated companies have shed about 8 percent. The oil well services & equipment companies have been the hardest hit, on average shedding nearly 13 percent of their value. Yet, the services & equipment sector also had the largest number of oil-related companies appearing recently on the Reuters Select stock screens. Out of the 388 companies from these three sectors in the Reuters.com stock universe, only 24 recently appeared on the Reuters Select stock screens. Of those, 14 were services & equipment companies, nine were operations firms, and only one was an integrated company. (Click here for an Excel sheet comparing the 24 oil-related companies from the Reuters Select stock screens.)
The Reuters Select Contrarian Opportunities screen is designed to find companies that have fallen out of favor with the market. This value screen starts off by filtering for stocks that have fallen more than 15 percent in the last four weeks and performed worse than the industry average. Unit Corp., a member of the oil & gas operations industry, saw its shares slide nearly 16 percent in this period.
To narrow down our list of 24 companies, we started by filtering on the basis of valuation metrics. We screened for those stocks where the price to earnings [P/E] ratio was below the industry norm. This shortened the list to 13 companies, including Unit Corp.
Then we turned to other valuation measures and filtered for names that also had P/Sales and P/Cash Flow ratios that were south of the industry averages. This shortened our list to 10.
It is not enough for a stock to seem like a bargain; we also want some indication that the company operates relatively efficiently. For this, we turned our attention to profit margins. After all, wider margins allow more revenue to pass through to the bottom line. This is beneficial in both robust and soft markets. If business is solid, then more of the additional revenue gains end up as earnings. Similarly, if market conditions soften and sales slip then companies with wider margins have more flexibility before earnings turn into losses than firms with slimmer margins. We filtered for companies that had wider-than-average operating and net profit margins in the trailing 12-month [TTM] time frame. This dropped the list to six names.
Unit Corp.'s solid operating margins helped it not only clear our criteria here, but also satisfied a key requirement of the Reuters Select Strong Operating Margins screen, where the company also appeared. To land on this screen, a company must have operating margins that are wider than the industry norm over both the TTM and five-year periods and the company's TTM operating margin must be at least 25 percent better than its own five-year mean. As indicated below, Unit Corp. nails this requirement with a TTM reading just over 36 percent of its five-year figure.
Measures of management effectiveness are useful for gauging a company's ability to generate net income with available resources. Return on investment [ROI] examines net income relative to shareholder equity, long-term debt and all other long-term liabilities. We want companies that have outperformed their industry peers in both the TTM period and over the last five years. Here two companies stood out.
Unit Corp. satisfied another requirement of the Contrarian Opportunities screen, which requires that the five-year ROI figure must be above the industry norm.
We returned to valuation considerations for our last filter. Our earlier efforts focused on earnings, sales, and cash flow per share in the TTM time frame. But we also want metrics that take into consideration expectations of future performance. Here we used the PEG ratio. The PEG ratio is calculated by first taking the current stock price and dividing it by the consensus of analyst estimates for future earnings per share [EPS] for both the current year and for next year. This yields forward P/E ratios. These ratios are then divided by the consensus of analyst estimates for the rate of long-term EPS growth. Typically, more-conservative investors seek out companies with PEG ratios that are below 1.00. Numbers a bit north of this threshold are still in value territory. Although both Unit Corp. and EnCana Corp. (NYSE:ECA) have reasonable PEG ratios, Unit's reading is much lower.
With Unit Corp. now standing alone, we dug a little deeper and found the company also posted superior revenue growth rates over the TTM and five-year periods. The company's top-line advances helped it land on the Reuters Select Sales Growth Leaders stock screen, which is designed to highlight companies with above-average revenue growth. The company's superior EPS growth rates helped here, too. The Sales Growth Leaders screen requires that EPS growth must be faster than the industry figures in the TTM and five-year periods, to ensure that some of the company's revenue advances are benefiting EPS growth.
Disclosure: At the time of publication, Erik Dellith did not directly own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.