5 Oil & Gas Stocks That Have Shown They Can Grow Safely

Oil company stocks have risen in recent weeks as oil prices have rebounded. But the next stage will be tougher. Investors and lenders are wary of putting money into energy names because of their historic underperformance. Even those with strong balance sheets often have failed to increase earnings and produce cash. So why would anyone want to give them more money?

Barron’s ran a screen to find companies whose earnings were rising before the crisis, and whose balance sheets look particularly healthy. Six companies both increased their earnings between 2018 and 2019 and produced enough operating income to cover their interest payments by at least two times through the end of last year. We also eliminated companies with net debt more than four times as high as their adjusted cash flow to ensure we were zeroing in on safer names. One of the companies that made the cut as of the end of 2019, refiner PBF Energy (PBF), saw its interest coverage decline in the first quarter, so it was removed from the list.

The majority of oil-and-gas companies are likely to lose money in 2020 because of the Covid-19 pandemic. So it makes sense to look at their trajectory before the pandemic to see which of them were able to increase their earnings. Those that showed that ability in 2019 are more likely to be able to repeat that performance in the future.

A Safer Way to Profit

Just a few oIl and gas companies have grown earnings while safely covering their debt payments

Source: Factset

Cabot Oil & Gas (COG) is a natural-gas producer based in Houston that drills extensively in West Virginia and Pennsylvania and transports its gas to buyers throughout the Northeast. The company has long-term contracts in place that have allowed it to persevere through the crisis. Natural gas is expected to rise in price over the next year as oil producers slow their drilling, reducing the amount of associated gas they produce and decreasing the oversupply of gas. Cabot’s stock has risen 4.2% this year, beating the S&P 500 by 8% and the industry by 35%. Cabot trades at 17.7 times its expected earnings over the next four quarters.

Calgary-based Canadian Natural Resources (CNQ) has had a rough year, dropping 47%. But its 7% dividend yield and strong cash flow make its shares attractive to some analysts at current prices. The company has stayed on top of its interest payments and its debt load, unlike some peers. Bank of America analyst Asit Sen wrote on Monday that Canadian Natural was one of his core exploration-and-production picks, because of its “strong cash flow profile and growth metrics with an attractive project backlog.” He sees shares rising to $25 from a recent $17.32.

ConocoPhillips (COP) is the largest independent oil-and-gas producer in the U.S. Its balance sheet is also one of the best in the industry, making it likely that banks will keep lending to Conoco when the crisis ends. After a loss this year, analysts expect the company to return to profitability in 2021. “As investors filter through the Energy sector looking for quality companies on sale, we believe that ConocoPhillips is one that will be able to emerge from the downcycle with its financial position still showing resilience,” Goldman Sachs analyst Neil Mehta wrote last month.

CVR Energy (CVI), a refiner controlled by Carl Icahn, also made the list. CVR owns refineries that operate in Oklahoma and Kansas. It is reportedly considering various options, including putting itself up for sale.

Dover (DOV) is an Illinois-based industrial company that makes equipment for oil-and-gas companies. Shares are down 17% this year, a much smaller drop than the broader industry.

Source