Buying Oil Company Stocks – Guy’s Metrics

oil company stocksAs you may or may not know, the ideal energy company stocks to own is one that has a high percentage of oil reserves.  Specifically, a high oil-to-natural-gas ratio is one of the most important factors to help determine which energy stocks to buy.  If you’re looking to strike oil with the right companies, this is just one of many metrics to look for.  Here are some more.

You should also be on the lookout for high replacement levels, low exploration and development (E&D) costs, long reserve lives and solid financials.

The Power is in Proved Reserves

I concentrate on energy exploration and production (E&P) companies because if you own the stock, you are an owner in the companies’ reserves and leases.

A company’s Proved Reserves are extremely important. This term has a very specific definition. According to the Texas Railroad Commission, proved oil reserves are:

“[T]he estimated quantities of crude oil, natural gas and natural gas liquids which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates renewal is reasonably certain.”

Most companies combine their oil and natural gas liquids when reporting their oil reserves.  I track about 30 E&P companies.  Here are some of them.

Canadian Natural Resources (CNQ), Suncor Energy (SU), Occidental Petroleum (OXY), Marathon Oil (MRO), Hess Corp. (HES), Continental Resources (CLR), Pioneer Natural Resources Co. (PXD), EOG Resources (EOG), Apache (APA), Devon Energy (DVN), Anadarko Petroleum Corporation (APC), Encana (ECA), Noble Energy (NBL) and Talisman Energy (TLM) have over 1 billion BOE (Barrels of Oil Equivalent).

Most of the companies I research are from the U.S.; four are Canadian. About half of the reserves reside in the U.S. — the rest hail from Canada along with the rest of the world (i.e. Latin America, Middle East, Africa, Asia, Europe, etc.).

Here are some important takeaways:

  • Denbury Resources (DNR), Halcon Resources (HK) and Marathon Oil (MRO) probably have the highest percentage of oil in their production.
  • The last three companies on the list have very high natural-gas-to-oil reserves.
  • Suncor is one of Berkshire’s holdings (to the tune of about $450 million). It’s an interesting play because of its high reserves, good financial health and regular dividend.  As for Berkshire’s other energy holdings, I prefer to avoid ExxonMobil and ConocoPhillips because they’re what analysts call “integrateds” — that is, they’re not pure plays on oil. They are also huge companies that have many low-margin businesses (i.e., retail, refining, chemicals, and oil-and-natural-gas transportation/transmission).

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