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Commodity price changes have been and will be facts of life. They are hard (if not impossible) to predict, causing stress to commuting workers and retirees on fixed incomes. Investors are quick to flock to Exxon (NYSE:XOM) and total return ETfs like OIL, but which oil companies will increase in value most, allowing investors to hedge the price of oil through investment?

Fortunately, the impact of oil price hikes on oil producers was observed in the 2008 commodity bubble. The changes in share prices over the past five years provide a road map for how the shares of oil producers fared at different prices. The past five years of data show significant, but limited dependence on crude oil prices (west Texas intermediate crude oil spot price per barrel) for several energy industry stocks:

Ticker

Gross Margin

Slope

RSQ

ATPG

0.754

0.81

0.21

SU

0.455

0.71

0.36

HES

0.274

0.63

0.28

CEO

0.639

0.52

0.19

CVX

0.422

0.36

0.24

OTC:HGOCF

N/A

0.24

0.02

The slope is the ratio of returns on the stock to returns on crude oil over the past 5 years. For example, ATP Oil & Gas Corp. (ATPG) returns, on average, were 0.81 times the price increase of oil. The R-squared (RSQ) value is the percentage of the variance in the stock’s returns that can be explained by changes in oil price. Notice that over five years the prospects of these companies are influenced by many factors, not just the price of oil.

ATP Oil & Gas Corp. (ATPG) has responded the most out of all these stock to price changes in oil. The company’s balance sheet is weak, with liabilities that are greater than assets, resulting in negative equity. ATPG has also suffered negative trailing twelve month earnings. As a result, it has a negative price to book ratio, and a negative trailing price to earnings ratio. Though its price to sales ratio is 0.89, and it has an expected forward price to earnings ratio of 7.91, it is hard to recommend a negative equity stock.

Suncor Energy Inc. (NYSE:SU) has a stronger balance sheet. It is arguably the most expensive stock on the list with a price to book ratio of 1.29, a price to sales ratio of 1.27, and a price to earnings ratio of 12.34 (trailing twelve months).

Hess Corporation (NYSE:HES) provides a combination of cheap valuations and responsiveness to oil price. Hess has a price to book ratio of 1.00, a price to sales ratio of 0.51, and a price to earnings ratio of 6.85 (trailing twelve months). Its low gross margins bode well for future responsiveness to oil price since its lower margins jeopardize future profits in the event of lower oil prices.

CNOOC Ltd. (NYSE:CEO) has a higher profit margin and is less responsive to oil prices. Its valuations are less attractive than those of HES, with a price to book ratio of 2.50, a price to sales ratio of 2.95, and a price to earnings ratio of 9.89 (trailing twelve months).

Chevron Corp. (NYSE:CVX) is a cheaper alternative with less co-movement with crude oil. It has a price to book ratio of 1.69, a price to sales ratio of 0.90, and a price to earnings ratio of 8.52 (trailing twelve months).

Heritage Oil PLC (OTC:HGOCF) has failed to move with prices of oil. The company needs to increase sales to improve its valuation. It has a price to book ratio of 0.88, a price to sales ratio of 198.03, and a price to earnings ratio of 0.98 (trailing twelve months).

So what is the best way to use these stocks to construct an oil hedge? Mixing different stocks will increase the percentage of price changes that are caused by oil price since the stock-specific risks will drop with diversification. However, the overall valuations in the portfolio will be an average of company valuations.

A portfolio of 30% SU, 50% HES, and 20% CVX would have a slope of 0.60, an R-squared of 0.35, a price to book ratio of 1.23, a price to sales ratio of 0.82, and a price to earnings ratio of 8.83 (trailing twelve months). This would be a cheap portfolio with 30% of its returns corresponding to changes in the price of oil.

Source: 6 Stocks That Could Jump If Oil Hits $150 A Barrel