Regardless of the sector or the size of a company an investor prefers, it is always important to first analyze a prospective investment to see if is well positioned for future growth. Earnings and liquidity are two measurements that provide insight. To find out how a company is performing currently, looking into bottom line profitability is very helpful. Cash reserves are equally informative, as these funds will assist if necessary in times of a lull or to add momentum to growth opportunities. With these traits of liquidity and profit in mind, we developed a short list of oil and gas stocks that rate high in both respects. Take a look below to see if any of these companies meet your standards.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
Return on Assets [ROA] illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue very few can make very large profits with little investment.
The Net Margin is a profitability metric that illustrates, by percentage, how much of every dollar earned gets turned into a bottom line profit. This is just one of many profitability metrics used by investors and analysts to better understand what the company is being left with at the end of the day. Generally, a firm that can expand its net profit margins over a period of time will see its stock price rise as well due to the trend of increasing profitability. Net Margin = Net Income/Total Revenue.
We first looked for oil & gas stocks. We then looked for companies with a large amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We next screened for businesses that have strong profitability relative to their asset base (ROA [TTM]>10%)(Net Margin [TTM]>10%). We did not screen out any market caps.
Do you think these stocks deserve to trade higher? Use this list as a starting-off point for your own analysis.
1) Vaalco Energy Inc. (NYSE:EGY)
|Industry||Independent Oil & Gas|
|Return on Assets||13.49%|
VAALCO Energy, Inc., an independent energy company, together with its subsidiaries, engages in the acquisition, exploration, development, and production of crude oil and natural gas. The company owns producing properties and conducts exploration activities as an operator of consortiums internationally in Gabon and Angola, as well as conducts exploration activities as a non-operator in the British North Sea. It also operates three shale properties in the United States located in Montana and Texas; and owns minor interests in conventional production activities as a non-operator in Brazos County, Texas, Pickens County, Alabama, and in the Ship Shoal area of the Gulf of Mexico.
The company owns a 30.35% interest in the exploration acreage within the Etame Marin block; owns a 28.1% interest in the development areas in and surrounding the Etame, Avouma, South Tchibala, and Ebouri fields; interests in Mutamba Iroru block located onshore near the coast in central Gabon; a 40% working interest in approximately 1.4 million acre Block 5 offshore, Angola; a 640 and 480 acre lease in the Granite Wash formation in North Texas; a 70% working interest in approximately 5,200 acres in Sheridan County, Montana; and a 65% working interest in approximately 22,000 gross acres in Roosevelt County, Montana. VAALCO Energy, Inc. was founded in 1984 and is headquartered in Houston, Texas.
2) Baytex Energy Corp. (NYSE:BTE)
|Industry||Independent Oil & Gas|
|Return on Assets||12.35%|
Baytex Energy Corp., an oil and gas company, engages in the acquisition, development, and production of oil and natural gas in the western Canadian Sedimentary Basin and the United States. It offers heavy oil, light oil, and natural gas liquids. As of December 31, 2011, the company had proved plus probable reserves of approximately 252 million barrels of oil equivalent. Baytex Energy Corp. was founded in 1993 and is headquartered in Calgary, Canada.
3) CNOOC Ltd. (NYSE:CEO)
|Industry||Independent Oil & Gas|
|Return on Assets||16.17%|
CNOOC Limited, through its subsidiaries, engages in the exploration, development, production, and sale of crude oil, natural gas, and other petroleum products. Its oil and natural gas properties are located in offshore China, which include Bohai Bay, western South China Sea, eastern South China Sea, and East China Sea, as well as in Indonesia, Iraq, other regions in Asia, Australia, Nigeria, Uganda, the United States of America, Canada, and Argentina. As of December 31, 2011, the company had net proved reserves of approximately 3.19 billion barrels-of-oil equivalent. It also provides bond issuance services. The company is headquartered in Central, Hong Kong, and is considered a Red Chip company due to its listing on the Hong Kong Stock Exchange. CNOOC Limited is a subsidiary of China National Offshore Oil Corporation.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 09/15/2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was prepared for ZetaKap Media by one of our full-time analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.