4 Oil Stock Picks With Low Debt-To-Capital Ratios
It seems there is no end to the oil industry’s woes. The number of defaults is mounting for the beleaguered sector and the latest victim of this trend is Samson Resources Corp. Last Wednesday, it filed for chapter 11 bankruptcy, which will erase a substantial amount for its investors.
Several others are lined up for a similar fate. Moody’s has rated nearly 25% of oil and gas producers at B3 or lower, which emphasizes their junk status. However, other sector players are better placed and have taken appropriate measures to deal with the situation. This is why it may be a good idea to pick stocks from this sector which have low debt capital ratios.
Default Crisis Intensifies
The seriousness of the situation has recently been illustrated by Fitch Ratings. According to the agency, the industrywide rate of default has increased from 3.3% in August to 4.8%. This is the highest rate witnessed since 1999, an outcome of the oil price plunge.
Expectedly, the exploration and production subsector is the worst placed among the industry, with a default rate of 8.5%. These companies have a default volume of $10.4 billion, a five-year high. Producers had managed to survive the price plunge because investors had continued to push money into these companies. However, now lenders have decided otherwise and they are running out of cash at a worrying rate.
In August, Hercules Offshore Inc. (HERO - Snapshot Report) filed for bankruptcy in order to carry out its debt for equity swap. According to Fitch, it is one of six companies, along with Samson, which have defaulted over the last six weeks.
October may witness several more defaults as banks lower their credit levels for such companies. This is an outcome of the sectoral regulator telling banks that several loans issued to producers are worrying.
Bonds Underline Industry Situation
Energy bonds with junk ratings have been mirroring the industry’s crisis. According to Barclays PLC (BCS - Analyst Report), the yield on a bunch of such U.S. bonds has increased to 11% from the year-ago figure of 5.9%. This means prices are sliding and so is investors’ belief in the sector’s debt securities.
It comes as no surprise that investors in such companies are looking to move on. Earlier this year, buyers of distressed debt had flocked to purchase bonds issued by troubled oil companies. The major assumption was that oil prices would recover or at least remain within a predictable range. In reality, prices actually plunged taking the value of such debt down as well. Since then, bonds worth billions of dollars issued by the likes of Midstates Petroleum Company, Inc. (MPO - Snapshot Report), SandRidge Energy, Inc. (SD - Snapshot Report) and Energy XXI Ltd. (EXXI - Snapshot Report) have been offloaded.
Oil Powered States Recover
A recent study by personal finance website WalletHub has ranked the 150 biggest cities in the U.S. in terms of their economic advancement since the 2007 crisis. Among the bottom 15, four are in Nevada and five in Arizona. Cities in California have also found it difficult to recover.
However, certain cities have performed even better than they did before the recession. Interestingly, more than 50% of those in the top 10 are from states which depend on the energy sector for growth. This includes the likes of Alaska, Oklahoma and Texas.
This underlines the contribution of the oil boom witnessed in past years. Shale fueled this phenomenon to a great extent and that may be changing. But it will be some time before the industry settles into other options. Even then, the effects of the recovery are likely to endure.
Low Debt Choices
Some energy companies may still have the ability to withstand falling prices for a long period. These companies have restructured costs or taken other measures to deal with the prevailing situation. In this event, it may be a good idea to look at energy companies that have low debt capital ratios, which make debt servicing relatively easier for them.
Below we present some stock choices from the oil industry with the lowest debt capital ratios in the sector. We have narrowed down our search based on good Zacks Rank and other relevant metrics.
Tesoro Corporation (TSO - Analyst Report) is an independent refiner and marketer of refined petroleum products in the western U.S.
The company has a Zacks Rank #1 (Strong Buy) and debt to capital ratio of 34%. Tesoro has expected earnings growth of 80.1% for the current year.
Northern Tier Energy LP (NTI - Snapshot Report) is an independent downstream energy company with refining, retail and pipeline operations that serves the PADD II region of the United States.
The company has a Zacks Rank #1 (Strong Buy) and debt to capital ratio of 41.8%. Northern Tier Energy has expected earnings growth of 5.1% for the current year.
Alon USA Partners, LP (ALDW - Snapshot Report) is a marketer and refiner of petroleum products, mostly in the South West and South Central regions of the U.S.
The company has a Zacks Rank #1 (Strong Buy) and debt capital ratio of 58.7%. The projected growth for the current year is 19.9%.
Matrix Service Company (MTRX - Snapshot Report) offers a variety of services to the oil, gas, power sectors among other industries. This includes maintenance, fabrication, construction and engineering services.
The company has a Zacks Rank #1 (Strong Buy) and debt to capital ratio of 3%. The projected growth for the current year is 25.4%.
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