Buy One, Get One Free! (Not Really…But Energy Stocks Are Definitely On Sale).

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Just as I tend to avoid picking individual technology companies (sector changes way too fast…what is hot today is obsolete tomorrow…to get my technology fix I would leave it to more experienced mutual fund managers), my interest in energy players would be the large E&P companies,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:

  1. Long-run average Reserve Replacement Ratio above 100% (or as close to 100% as possible).
  2. Lifting Costs per BOE (barrel of oil equivalent)…self-explanatory here…the lower the better.
  3. Proven & Probable (2P) Reserves (the larger the better), and by extension market value per 2P reserves (the cheaper the better).
  4. 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.
  5. 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?


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