Sunday, June 3

Week 48 - Oil & Gas Producers

Situation: Oil & Gas producers have been the cornerstone of the world’s economic edifice for 50 yrs and will likely serve in that capacity for another 50. But when it comes to pricing those products, companies are left at the mercy of worldwide demand. China is now driving 40% of demand for commodities, even though it has only 20% of the world’s population. With respect to oil & gas, the US still ranks first but China is gaining fast and is #1 with respect to demand for iron ore and copper. China’s appetite is so great that commodity producers are in danger of over-expanding just as China reaches its monetary borrowing limit. Investors have to keep an eye on supply & demand, except with respect to oil & gas (because supply rarely outstrips demand for any length of time).

Our mission in this week’s blog is to document the return and risk from owning stock in oil & gas producers, relative to owning other types of stock. We can start with a database of global stocks - the 2,157 companies larger than $1B in stock market value in the Kiplinger Stock screener found at this link. We narrowed that list to 97 companies of the type we find attractive. In other words, these companies meet our criteria of having a:
    market capitalization >$5B,
    dividend yield greater than 1.4%/yr,
    5 yr dividend growth greater than 5.8%/yr,
    current return on investment (ROI) greater than 10%/yr,
    current return on assets (ROA) greater than 6.9%/yr, and 
    price/earnings ratio below 17 (to exclude overpriced companies).
The group of 97 companies that makes our cut includes most of the companies on the ITR Master List (Week 39). 

The oil & gas producers have been placed at the top of the attached Table. For comparison, the cyclical “Core Holding” stocks (Week 22) compose the following group in the Table. Similarly, the non-cyclical “Lifeboat Stocks” (Week 23) are listed next. Gold mining stocks form the last group (Week 45), followed by an S&P 500 Index fund.

Companies in each group are listed in decreasing order of finance value (which is calculated as returns minus risk). Data indicating outstanding company performance are highlighted in light blue, whereas, data indicating sub-par performance are highlighted in red. A quick scanning of the spreadsheet shows oil & gas stocks pick up most of the light blue highlights indicating outstanding company performance.

Bottom Line: A prudent investor cannot escape the necessity and wisdom of investing in oil & gas producing companies. This position, as related to long term investing, is acceptable because the risk of loss in value during a bear market is remarkably low for the oil & gas stocks on our Master List (i.e., XOM, CVX and OXY), particularly given the extent of out-performance during a bull market.

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