5 Oil And Gas Companies Not Worth An Ounce Of Black Gold

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Includes: ANDX, KMI, NSH, OILT, WGP-OLD
by: Douglas Denhartog
Summary

These five companies have a median P/E ratio of 38.7 while the S&P 500 has a P/E ratio of approximately 14.3.

Each of these five companies has a current and quick ratio of 1 or less.

Four of these five companies have an earnings payout ratio greater than 125%.

I recently published the 8 Oil and Gas Companies To Consider While Oil Prices Remain Depressed in which I introduced the eight oil and gas companies that cumulatively out ranked their peers by appearing most often in the top 20% of the following same nine metrics. This article identifies the 5 oil and gas companies which appeared most often among the bottom 20% of oil and gas companies when looking individually at:

  • percent below 52-week midpoint;
  • dividend yield;
  • earnings payout ratio;
  • debt to equity;
  • current ratio;
  • quick ratio;
  • price to earnings;
  • price to sales; and
  • price to book.

Any reference to "oil and gas" companies in this article refers to companies from the following industries:

  • Independent Oil & Gas;
  • Major Integrated Oil & Gas;
  • Oil & Gas Drilling & Exploration;
  • Oil & Gas Equipment & Services;
  • Oil & Gas Pipelines; and
  • Oil & Gas Refining & Marketing

Methodology

All fundamental data was obtained from Finviz and all price data was obtained from Yahoo! Finance. Companies which had negative earnings per share and no dividend yield were pre-filtered from being able to participate in this analysis, which filtered an original list of 362 companies down to the 132 analyzed in this article. For each metric listed above the companies were sorted by their respective metric value from least to greatest, except for dividend yield, current ratio and quick ratio which were sorted from greatest to least. Each company was assigned an initial point value of zero. A point was then assigned to each of the top 20% of all companies for each metric and a point was subtracted from each company in the bottom 20% for each metric. This means a maximum of 9 points and a minimum of -9 points was possible. The distribution of cumulative points for all nine metrics can be seen below in Chart 1 and a complete list of the companies analyzed is available in the article linked to above.

Chart 1. Cumulative Point Distribution

Metric 1. Percent Below 52-Week Midpoint

Percent below 52-week midpoint values were sorted from least to greatest. The median percent below 52-week midpoint of all companies was approximately -17.5%, while the median percent above 52-week midpoint of the bottom companies was approximately 7.4%. An oil and gas company whose stock price has held up during these last seven months warrants further investigation and could be considered to be indicative of companies the market thinks highly of, but for purposes of this analysis, a company whose stock is not on sale relative to its 52-week midpoint receives a bad mark.

Chart 2. Bottom Companies By Percent Below 52-Week Midpoint

Metric 2. Dividend Yield

Dividend yield values were sorted from greatest to least. The median dividend yield of all companies was approximately 3.6%, while the median dividend yield of the bottom companies was approximately 1.1%. This means the companies in Chart 3 yield less than one-third the median company, which could result in $25,000 lower dividends over a ten year period assuming an initial investment of $100,000 and no compounding of dividends. One consideration to make is these lower yielding companies may not need to reduce or suspend their dividend in the coming months/years, and may be of interest to investors looking for dividend paying oil and gas companies with "safer" near-term dividends.

Chart 3. Bottom Companies By Dividend Yield

Metric 3. Earnings Payout Ratio

Earnings payout ratio values were sorted from least to greatest. The median earnings payout ratio of all companies was approximately 47.5%, while the median earnings payout ratio of the bottom companies was approximately 149.1%. Investors usually begin to become concerned about a high earnings payout ratio when it reaches approximately 70%. These bottom companies are more than twice the 70% threshold and not a single one of these bottom companies has an earnings payout ratio of less than 100%.

Chart 4. Bottom Companies By Earnings Payout Ratio

Metric 4. Debt to Equity

Debt to equity values were sorted from least to greatest. The median debt to equity of all companies was approximately 0.5, while the median debt to equity of the bottom companies was 1.5. This means the companies in Chart 5 are three times more leveraged than the median company. Companies with high debt to equity like those in Chart 5 may find it more difficult to navigate this extended period of depressed oil prices because of their debt burden.

Chart 5. Bottom Companies By Debt To Equity

Metric 5. Current Ratio

Current ratio values were sorted from greatest to least. The median current ratio of all companies was approximately 1.4, while the median current ratio of the bottom companies was approximately 0.6. This means the median company is more than twice as capable of using current assets to cover their current liabilities than the companies in Chart 6. A current ratio of 1 to 1.5 is generally considered sufficient, unfortunately for companies in Chart 6, not a single one has a current ratio above 0.9.

Chart 6. Bottom Companies By Current Ratio

Metric 6. Quick Ratio

Quick ratio values were sorted from greatest to least. The median quick ratio of all companies was approximately 1.1, while the median quick ratio of the bottom companies was approximately 0.6. This means the companies in Chart 7 are nearly only half as able to use cash and equivalents to cover their current liabilities than the median company. Even more stringent than current ratio, a high quick ratio indicates a company's immediate ability to cover its current liabilities and the companies in Chart 7 may more quickly be facing cash issues during these times of low oil prices than the top companies I covered in the article linked to at the beginning of this article.

Chart 7. Bottom Companies By Quick Ratio

Metric 7. Price to Earnings

Price to earnings values were sorted from least to greatest. The median price to earnings of all companies was approximately 14.2, while the median price to earnings of the bottom companies was approximately 36. This means the median company is more than half as expensive by price to earnings than the companies in Chart 8.

Chart 8. Bottom Companies By Price To Earnings

Metric 8. Price to Sales

Price to sales values were sorted from least to greatest. The median price to sales of all companies was approximately 1.2, while the median price to sales of the bottom companies was approximately 7.4. This means the companies in Chart 9 are more than 600% more expensive by price to sales than the median company. The 511.2 price to sales of NSH was not included in Chart 9 to maximize the chart's visual message.

Chart 9. Bottom Companies By Price To Sales

Metric 9. Price to Book

Price to book values were sorted from least to greatest. The median price to book of all companies was approximately 1.5, while the median price to book value of the bottom companies was approximately 5.3. This means the companies in Chart 10 are more than 350% as expensive by price to book than the median company. The price to book for CLB and DKL were not included in Chart 10 so that the chart remained visually meaningful and was 42.9 and 75.8, respectively.

Chart 10. Bottom Companies By Price To Book

Conclusion

Of the 132 companies, 46, or 35%, managed accumulate a negative total point count. The distribution of cumulative points for all nine metrics can be seen in Chart 1 above and Table 2 below.

Table 2. Cumulative Point Distribution

Points

Companies

8

1

5

7

4

6

3

8

2

14

1

21

0

29

-1

9

-2

12

-3

9

-4

6

-5

5

-6

4

-7

1

The five oil and gas companies that cumulatively ranked worse than the other 127 are as follows in Table 3:

Table 3. The 5 Bottom Companies

Ticker

Company

Industry

Points

(NYSE:KMI)

Kinder Morgan, Inc.

Oil & Gas Pipelines

-7

(NYSE:NSH)

NuStar GP Holdings, LLC

Oil & Gas Pipelines

-6

(NYSE:OILT)

Oiltanking Partners, L.P.

Oil & Gas Pipelines

-6

(TLLP)

Tesoro Logistics LP

Oil & Gas Equipment & Services

-6

(NYSE:WGP-OLD)

Western Gas Equity Partners, LP

Oil & Gas Pipelines

-6

The bottom five companies in Table 3 generally have unsettling current metrics which indicate their dividends are not covered by earnings, that they have a less than generally desired cash and equivalents on hand and are very expensive by traditional metrics like price to book and price to earnings. The range for each metric of the five bottom companies is available below in Table 4.

Table 4. Median Ratios of The 5 Bottom Companies

Metric

Min

Median

Max

Percent Below 52-Week Midpoint

-13.2

2.5

9.9

Dividend Yield

2.2

4.0

5.8

Earnings Payout Ratio

96.6

139.8

189.3

Debt To Equity

0.1

2.1

6.2

Current Ratio

0.5

0.7

1.0

Quick Ratio

0.5

0.7

1.0

Price To Earnings

26.0

38.7

59.2

Price To Sales

5.4

110.1

511.2

Price to Book

1.8

8.5

15.0

Disclosure: The author is long CVX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.