By Chris Seabury
A common strategy that is used by investors to generate higher returns is to purchase oil-and-gas stocks. This is based on the belief that these firms will deliver higher earnings per share when prices of crude oil have remained consistently high. In the future profit margins are expected to increase from a rise in demand attributed to emerging economies (i.e. India and China). To determine what firms can benefit the most requires examining various players inside the sector. This will be accomplished by looking at Devon Energy (DVN), GMX Resources (GMXR), ExxonMobil (XOM), Chesapeake Energy (CHK) and Apache Corporation (APA). Therefore, use this information as a starting point for all future research.
Devon Energy trades at a forward price earnings ratio of 9.64. The profitability of the firm includes profit margins of 47.21% and operating margins of 43.55%. During the last year the earnings have been going from $1.84 to $1.34 (see below).
Devon Energy Earnings per Share
The balance sheet includes revenues of $10.08 billion, cash of $6.88 billion and $9.26 billion in debt. The debt to equity ratio is 43.87. This has caused the price of the stock to fall to $50.74 in early October. Since this time shares have recovered to the $67.50 range. This is below the 200-day moving average of $71.23 (which is bearish). These figures are illustrating how Devon Energy should be avoided. This is based on the high amounts of debt and debt to equity ratio. Moreover, the company has been financing growth through increasing the total amounts of borrowing. At the same time, the earnings have remained unstable and the momentum of the stock has stalled at $67.50. This is highlighting the numerous financial challenges affecting the firm. As a result, shares could decline further until the fundamental problems with the balance sheet and earnings are addressed.
GMX Resources has no forward price earnings ratio. The profitability of the company includes profit margins of -239.17% and operating margins of 22.09%. In the last 52 weeks the declining earnings have remained in a narrow range from -$0.07 to -$.03 (see below).
GMX Resources Earnings per Share
The balance sheet includes revenues of $117.81 million, cash of $3.23 million and debt of $372.80 million. The debt to equity ratio is 260.12. These different numbers have pushed the stock into a free fall with shares establishing a pattern of lower lows. Moreover, the company is trading below the 200-day moving average of $3.14 (which is bearish). These facts are illustrating how GMX Resources should be avoided. This based on the firm having no solid fundamentals, tremendous amounts of debt, declining profit margins, weak earnings and poor momentum. As a result, the stock will more than likely continue with the pattern of setting new lows in the future.
Exxon Mobil trades at a forward price earnings ratio of 10.44. The profitability of the firm includes profit margins of 9.75% and operating margins of 12.87%. In the three out of four quarters the earnings have been consistently rising from $1.85 to $2.18. The last report is when these figures declined to $2.13. The balance sheet includes revenues of $419.58 billion, $11.02 billion in cash and $16.76 billion in debt. The debt to equity ratio is 10.33. This caused the price of the stock to decline to $67.03 in August. Since this happened shares have increased to $85.94 (which is above the 200-day moving average). This is a bullish sign for the stock over the long term. However, the firm could see some kind of minor correction due to short term overbought conditions. These factors are highlighting how investors must watch the next earnings report to see if profits are rising. When this takes place, the markets will more than likely bid up the price based on the strong fundamentals and momentum.
Chesapeake Energy trades at a forward price earnings ratio 9.53. The profitability of the firm includes profit margins of 13.72% and operating margins of 21.76%. During the last year earnings have been volatile going from $ 0.70 to $0.76. In the last quarter earnings declined to $0.72 (see below).
Chesapeake Energy Earnings per Share
The balance sheet includes revenues of $10.88 billion, $111.00 million in cash and $11.84 billion in debt. The debt to equity ratio is 72.62. This caused the price of stock to decline to $20.61 (the 52 week low). This is below the 200-day moving average ($28.45) and is considered to be bearish. As a result, investors should avoid the stock. This is based on the inconsistent earnings, high amounts of debt and poor momentum. Until these issues have been addressed Chesapeake Energy will continue to remain weak.
Apache Corporation trades at a forward price earnings ratio of 7.86. The profitability includes profit margins of 25.76% and operating margins of 49.41%. The earnings over the last 52 weeks have been consistently rising for the last three quarter going from $2.19 to $3.22. During the recent announcement is when shares have declined to $2.95. The balance sheet includes revenues of $15.68 billion, cash of $586.00 million and $7.20 billion in debt. The debt to equity ratio is 25.81. This has caused the price of the stock to decline to $73.04 in October. Since that time shares have been testing resistance levels of $36.00. This is below the 200 day moving average of $106.59 (which is a bearish signal). These elements are showing how the stock is a valuation trap. The in consistent earnings and poor momentum are indicating that there is no catalyst to push shares higher. However, investors should watch the earnings report for increases in the bottom line numbers. If this is taking place, Apache could quickly take out resistance levels and test the 200 day moving average.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.