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Drilling for oil and gas is an expensive and not always productive endeavor. Many companies have to spend years in the exploratory phase and it is likely that debt is accrued during that time. Even when a company is generating significant profits, if the debt becomes unmanageable, it tends to weigh a company down and limit options. When a company is not hindered by debt, they can use those profits to seek out new sights and make strategic acquisitions. With this mind frame, we scanned for oil and gas drilling stocks that have strong profits and minimal debt. We came up with a short list of stocks that are worthy of additional research.

The operating profit margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time, this means that it's earning more per dollar of sales. Finding trends in the operating profit margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.

Return on equity (ROE) is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.

The long-term debt/equity ratio is a variation of the traditional debt-to-equity ratio; this value computes the proportion of a company's long-term debt compared to its available capital. By using this ratio, investors can identify the amount of leverage utilized by a specific company and compare it to others to help analyze the company's risk exposure. Generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios.

The debt/equity ratio illustrates how aggressively a company is financing its growth via debt. The more debt financing that is used in a capital structure, the more volatile earnings can become due to the additional interest expense. Should a company's potentially enhanced earnings fail to exceed the cost associated with debt financing over time, this can lead the company toward substantial trouble.

We first looked for oil & gas drilling stocks. Then we looked for businesses with strong profit margins (1-year operating margin>15%)(ROE [TTM]>30%). Next, we screened for businesses that have maintained a sound long term capital structure (Long Term D/E Ratio<.1). We then screened for businesses that have maintained a sound capital structure (D/E Ratio<.1). We did not screen out any market caps.

Do you think these stocks are worth more than their current valuations? Use our list to help with your own analysis.

1) Hugoton Royalty Trust (NYSE:HGT)

SectorBasic Materials
IndustryOil & Gas Drilling & Exploration
Market Cap$280.00M
Beta0.83

HGT stock chart

Key Metrics

Operating Profit Margin98.02%
Return on Equity38.61%
Long Term Debt/Equity Ratio0.00
Debt/Equity Ratio0.00
Short Interest2.22%

Hugoton Royalty Trust operates as an express trust in the United States. The company holds an 80% net profits interests in certain natural gas producing working interest properties of XTO Energy Inc. XTO Energy Inc. holds working interests in the Hugoton area that covers Texas, Oklahoma, and Kansas; the Anadarko Basin of western Oklahoma; and the Green River Basin located in southwestern Wyoming. Hugoton Royalty Trust was founded in 1998 and is based in Dallas, Texas.

2) MV Oil Trust (NYSE:MVO)

SectorBasic Materials
IndustryOil & Gas Drilling & Exploration
Market Cap$408.48M
Beta0.71

MVO stock chart

Key Metrics

Operating Profit Margin98.32%
Return on Equity132.68%
Long Term Debt/Equity Ratio0.00
Debt/Equity Ratio0.00
Short Interest2.34%

MV Oil Trust owns net profits interest in oil and natural gas properties of MV Partners, LLC. These properties are located in the Mid-Continent region in the states of Kansas and Colorado. The company's oil and gas properties include approximately 1,000 producing oil and gas wells. MV Oil Trust was founded in 2006 and is based in Austin, Texas.

3) Cross Timbers Royalty Trust (NYSE:CRT)

SectorBasic Materials
IndustryOil & Gas Drilling & Exploration
Market Cap$234.84M
Beta0.61

CRT stock chart

Key Metrics

Operating Profit Margin97.61%
Return on Equity129.01%
Long Term Debt/Equity Ratio0.00
Debt/Equity Ratio0.00
Short Interest0.25%

Cross Timbers Royalty Trust operates as an express trust in the United States. The company holds 90% net profits interests in various royalty and overriding royalty interest properties in Texas, Oklahoma, and New Mexico. It also holds 11.11% nonparticipating royalty interests in nonproducing properties located primarily in Texas and Oklahoma; and 75% net profits working interests in seven oil-producing properties, including four properties in Texas and three properties in Oklahoma. Cross Timbers Royalty Trust was founded in 1991 and is based in Dallas, Texas.

*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on August 22, 2012.

Source: 3 High-Profit, Low-Debt Oil & Gas Drilling Stocks