Articles and television programs abound about renewable energy sources and energy saving devices, with fossil fuels, particularly oil, being pictured as the bad guys. Electricity-generating windmills are sprouting in some areas faster than new-growth forests. Solar is shining as an alternative energy source at least as brightly as the sun in the morning sky. Hybrid vehicles are no longer for aging hippies but have become mainstream products.
But since its discovery 150 years ago in 1859 in Titusville, Pennsylvania, the king of the energy hill was and remains oil. According to The New York Times, oil accounted for 35% of the world's total energy consumption in 2005, versus second-place coal at 25% and third-place natural gas at 20%. While it is true oil's supremacy isn't what it used to be -- in 1973 it accounted for 44% of the world's total energy consumption -- it is still strong and shows no sign of running dry anytime soon.
Also strong has been oil's price. In late October, it reached above $80 a barrel for the first time this year. Of course it is way down from its $140-plus lofty price in 2008, but $80 ain't cheap, and some observers expect it to top $100 by early 2011. Automobile drivers in the US are now paying more for gasoline than they did a year ago, which is the first time in 2009 where this situation has occurred. The declining value of the dollar along with an uptick in many of the world's economies, suggest that oil's price is not about to substantially weaken, and may well continue its current upward trajectory. And as oil's price rises, so do the fortunes of the companies that extract, produce and distribute it.
Right now, the Guru Strategies I use to detect stocks currently worthy of being bought, are placing an emphasis on oil stocks. If your investment portfolio is not currently lubricated with oil stocks, this could be a good time to bring oil into the mix. Here are three oil companies worth considering.
One is the largest and fairest of them all, namely ExxonMobil (XOM). My Warren Buffett-based strategy likes: ExxonMobil's lead position in the industry; its solid, stable earnings history (EPS increased in eight out of the last 10 years and has not had a downtick in seven years); and its low debt relative to earnings -- last year it earned $30 billion and had debt of $7.1 billion. The company's return on equity over the past 10 years was a strong 25.2%, and the same can be said of its return on total capital, which was a robust 23.5%. Free cash flow per share is positive, and management has been earning an enviable 23.8% return on retained earnings. The final step in the Buffett strategy's analysis relates to the investor's expected rate of return over the next 10 years, given the stock's current price and the company's projected performance. Investing in ExxonMobil today is expected to produce a 12.6% annual return over the next decade, which is perfectly acceptable.
The Guru Strategy I based on Kenneth Fisher's writings likes Frontier Oil (FTO). Frontier is an oil refiner which can process heavy crude. Heavy crude is more difficult to process than light crude, and therefore sells for less than light, and not every refiner can process the heavier oil. This gives Frontier a competitive advantage. The company has refineries in Colorado and Kansas. The Fisher strategy likes Frontier because its debt is not onerous, and its price-to-sales ratio is very attractive at 0.30. In fact, that is less than half the acceptable P/S, which is 0.75. In addition, the company's long-term EPS growth rate is an impressive 23.59%, well above the 15% minimum established by the strategy. Further, the company enjoys positive free cash per share and a net profit margin of 6.25% (5% is the acceptable minimum).
The last company I will discuss is Noble Energy (NBL). Founded in 1932, Noble is an independent oil and gas producer. In addition to the US, it has operations in Israel, West Africa, the North Sea, Ecuador and China. This geographic diversity has helped the company in its exploration efforts, as its original place of exploration, the US, has experienced declining production. The Guru Strategy that emulates the approach of Peter Lynch likes Noble in large part because of its very favorable P/E/G ratio, which is the P/E ratio relative to growth and is an indication of how much the investor is paying for the company's growth. Noble's P/E is 12.52, while growth rate, which is based on the average of its three, four and five year historical EPS growth rates is 36.55%. This produces a P/E/G of 0.34. A P/E/G of 1.0 or less is acceptable, and below 0.5 is really notable. Noble's P/E/G is in notable territory. A couple of other aspects of Noble liked by the Lynch strategy: inventories are being well managed, and debt is reasonable when compared with equity.
Oil stocks look well positioned for the future, as the world economy recovers from its slump, and these three companies in particular look promising, given their performance and the analysis of the Guru Strategies. This is a good time to add oil to your portfolio, and any of these companies would fit the bill.
Published by Globes [online], Israel business news - www.globes-online.com - on November 5, 2009