Energy Stocks Can't Power Up

9/7/2015


The S&P 1500 Energy Sector Index's returns have ranked in the bottom half of the 10 sectors in six of the past seven years. Energy finished last in 2014, with a loss of 9%, while all other sectors posted positive total returns of 3% or more. It also ranks last so far this year, posting a loss of 20%, while the broader index has lost 6%.

Based on the sector's underlying fundamentals, the sell-off seems justified. Energy stocks have averaged 9% lower per-share profits and sales over the past 12 months, ranking last among the 10 sectors. Energy stocks look relatively inexpensive based on their average trailing P/E ratio of 19. But an average forward P/E ratio of 23, above the broad index's 20, underscores the sector's gloomy outlook. 

The direction of oil prices hasn't helped matters. Last fall, some drillers proclaimed the downturn as temporary. In November, Continental Resources ($30; CLR) brashly eliminated its oil hedges that ran through 2016. West Texas Intermediate (WTI), the benchmark for U.S. oil prices, fell to $44 per barrel in January before rallying to $61 a barrel in June.

In late August oil prices slipped below $40 a barrel, a level last seen in February 2009. They have since rallied but still sit 28% below the 2015 high. Oil prices exceeded $100 a barrel as recently as late July 2014.

Based on the numbers, drilling and refining appear to be the most attractive industries within the energy sector.

Refining and marketing stocks have held up the best over the past year, benefiting from strong profit growth. Refiners rank among the sector's few bright spots, boosting their profitability by converting cheap crude into refined products such as gasoline. With crude oil cheaper in the U.S. than overseas, U.S. refiners enjoy a competitive advantage over rivals in Europe and the Middle East. Even better, in July U.S. demand for gasoline reached its highest level since at least 1991. Refiners are the most attractive energy industry in Quadrix, earning an average Overall score of 82 and Value rank of 87.

Drillers have gotten routed over the past year despite operating results better than most of the sector. The industry averages a trailing and forward P/E ratio of just seven, and profit estimates have risen over the past 90 days.

The energy sector is littered with landmines for income investors. Energy stocks boast strong dividend growth, averaging a 30% higher distribution over the last year, which ranks third among S&P 1500 sectors. However, 9% of S&P 1500 energy stocks have cut their dividend in the past year — three times the rate for the broader index. Although the sector's average payout ratio of 43% of earnings may seem reasonable at first blush, the prospect of lower upcoming profits could put future dividends at risk. The drilling and refining industries have both experienced an elevated number of dividend cuts in the past year.

ENERGY DIVIDENDS: WATCH YOUR STEP!
Dividend cuts are more prevalent in the S&P 1500 energy sector than any of the other nine sectors. About 9% of energy stocks paid a lower dividend in the past 12 months than they did in the year-earlier 12-month period — three times the rate of the broader index.
S&P 1500 Energy Industry
(Number Of Companies)
Dividend
Yield
(%)
1-Year
Dividend
Change
(%)
% Of Stocks
That Cut
Dividends
In Past Year
Payout
Ratio
(%)
Coal & consumable fuels (2)
0.1
(33)
50
12
Drilling (11)
3.6
43
27
29
Equipment & services (28)
1.3
42
7
50
Exploration & production (35)
1.1
11
3
40
Integrated oil & gas (3)
4.6
7
0
77
Refining & marketing (9)
2.2
61
11
23
Storage & transportation (5)
5.1
27
0
133
S&P 1500 energy sector (93) avg.
1.9
30
9
43
S&P 1500 Index (1,500) avg.
1.8
27
3
45
Energy sector's rank among
10 S&P 1500 sectors
6.0
3
1
5

Although oil companies claim they want to preserve long-term growth, recent actions could signal a prolonged downturn. An auction for drilling blocks in the Gulf of Mexico in August saw the lowest interest from oil producers since 1986. Chevron ($78; CVX) and Exxon Mobil ($73; XOM) skipped the auction. Given the long-term nature of energy production, cutting back on new projects today puts future production growth at risk. Chevron, Continental, and Exxon are rated B (average).

FORECASTS' ENERGY STOCKS
We cover 16 energy stocks on our Monitored List (www.DowTheory.com/Go/Mon). All but one of these stocks are rated B (average) or C (below average), dragged down by mediocre Quadrix scores, subpar growth potential, or both. Given the sector's weak fundamentals, we're in no hurry to add energy to our buy lists.
12-Mo. Chg.
----- Quadrix Scores -----
Company (Price; Ticker)
Div.
($)
Yield
(%)
1-Year
Dividend
Change
(%)
Payout
Ratio
(%)
EPS
(%)
Sales
(%)
Trailing
P/E
1-Year
Total
Return
(%)
Momen-
tum
Value
Overall
Industry
Rating
Anadarko Petroleum
($70; APC)
1.08
1.6
33
132
NM
(22)
85
(38)
7
25
8
Exploration
C
Apache ($43; APA)
1.00
2.3
18
43
NM
(32)
19
(57)
4
22
8
Exploration
C
BP ($32; BP)
2.38
7.4
5
361
(83)
(25)
49
(32)
4
52
16
Integrated
oil
C
Chevron ($78; CVX)
4.28
5.5
5
60
(37)
(26)
11
(39)
8
72
30
Integrated
oil
B
ConocoPhillips
($48; COP)
2.96
6.1
6
166
(79)
(30)
27
(40)
2
42
12
Exploration
C
Continental Res.
($30; CLR)
0.00
0.0
NM
0
(16)
25
15
(62)
15
58
39
Exploration
B
EOG Resources
($78; EOG)
0.67
0.9
54
28
(43)
(10)
32
(28)
8
39
30
Exploration
B
Exxon Mobil
($73; XOM)
2.92
4.0
9
54
(28)
(24)
13
(26)
7
64
36
Integrated
oil
B
Halliburton
($38; HAL)
0.72
1.9
20
22
(10)
0
12
(43)
43
72
71
Equipment
B
Hess ($58; HES)
1.00
1.7
0
NM
NM
(20)
 NM 
(43)
4
47
15
Exploration
C
National Oilwell
($41; NOV)
1.84
4.5
48
35
(5)
(1)
8
(52)
9
87
53
Equipment
B
Occidental Petroleum
($71; OXY)
3.00
4.2
7
118
NM
(31)
28
(31)
2
21
7
Integrated
oil
C
Phillips 66 ($79; PSX)
2.24
2.9
29
32
37
(29)
11
(10)
74
75
89
Refining
B
Plains All American
($35; PAA)
2.78
8.0
10
141
(31)
(25)
18
(42)
8
51
22
Storage
C
Schlumberger
($75; SLB)
2.00
2.7
26
41
(6)
(5)
15
(30)
24
69
61
Equipment
B
Valero Energy
($59; VLO)
1.60
2.7
42
19
71
(22)
7
10
91
97
100
Refining
A
Notes: Quadrix scores are percentile ranks, with 100 the best. Ratings are as follows: A (above average), B (average), C (below average).

 

ENERGY STOCKS BRING UP THE REAR
Among the S&P 1500 Index's 10 sectors, energy stocks on average rank near or at the bottom on key metrics for operating momentum, analyst-revision trends, and total returns. The average energy stock looks attractive based on trailing P/E ratio but expensive based on its forward P/E, reflecting a weak profit outlook for the sector. There are some pockets of strength within the sector, and we bolded the best metric for each industry.
12-Mo. Oper.
Momentum
EPS-Revision Trends,
Curr. Fiscal Year
----- Valuation -----
Total Return
Quadrix Scores
S&P 1500 Energy Industry
(Number Of Companies)
EPS
Chg.
(%)
Sales
Chg.
(%)

EPS Est.
% Change,
Past
90 Days

% Of
Stocks
With
Rising
Ests.,
Past
90 Days
Forward
P/E
Trailing
P/E
3
Mos.
(%)
1
Year
(%)
Momen-
tum
Value
Overall
Coal & consumable fuels (2)
(11)
(7)
(19)
50
 NM 
42
(41)
(70)
10
61
22
Drilling (11)
(4)
2
8
91
7
7
(33)
(58)
41
82
56
Equipment & services (28)
(13)
(7)
(7)
29
25
18
(23)
(50)
24
70
46
Exploration & production (35)
(10)
(10)
(9)
37
36
24
(34)
(54)
13
56
29
Integrated oil & gas (3)
(33)
(27)
(18)
0
19
17
(16)
(30)
6
52
24
Refining & marketing (9)
20
(16)
2
67
12
9
(9)
(10)
56
87
82
Storage & transportation (5)
(21)
(3)
(6)
20
35
39
(16)
(29)
40
33
28
S&P 1500 energy sector (93) 
(9)
(8)
(5)
42
23
19
(27)
(48)
25
65
42
S&P 1500 Index (1,500) 
6
6
(1)
37
20
20
(10)
(1)
52
57
60
Energy sector's rank among
10 S&P 1500 sectors
10
10
8
3
10
4
10
10
10
2
10
Note: Quadrix scores are percentile ranks, with 100 the best.     NM Not meaningful.

 

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com