OPEC’s decision to keep pumping crude thereby keeping a lid on oil prices has had a devastating effect on many players in the oil sector. However, I believe the energy cartel’s strategy to maintain market share in the face of increasing production from non-conventional sources has opened up an avenue for the long-term investor to initiate (or double down) exposure to E&P players. Energy stocks and volatility go hand-in-hand…you cannot have exposure to this sector without experiencing some large degrees of volatility.
Just as I tend to avoid picking individual technology companies (sector changes way too fast…what is hot today is obsolete tomorrow…to get my technology fix I would leave it to more experienced mutual fund managers), my interest in energy players would be the large E&P companies, not the junior ones ratcheting up production with hopes of catching the eye of the big players and being bought out at a nice premium.
Like in any sector, there are several energy sector KPIs that I would pay a bit more attention to:
- Long-run average Reserve Replacement Ratio above 100% (or as close to 100% as possible).
- Lifting Costs per BOE (barrel of oil equivalent)…self-explanatory here…the lower the better.
- Proven & Probable (2P) Reserves (the larger the better), and by extension market value per 2P reserves (the cheaper the better).
- Diversity of reserves. While the sad truth is that the majority of the world’s energy reserves are located in less than hospitable environs, I would avoid any Company with an over-dependence on an one particular “inhospitable” locale.
- The usual financial suspects including strong CFO, strong debt service capacity and a manageable debt load.
Having said the above, Italian energy giant ENI S.p.A, Norway’s energy champion STATOIL ASA and France’s TOTAL S.A. have piqued my interest and I think are worthy of a closer look.
What say you…do you think now is the time to tip-toe (or double down) on energy?
