The third quarter of 2016 is in the books, so it's time to see which energy stocks performed best.
I screened for Q3 total shareholder return (which accounts for dividends distributed during the quarter) using the proprietary stock screen I developed for The Energy Strategist. This screening tool is Excel-based, and extracts data from the subscription-only S&P Global Market Intelligence database.
One thing I noticed is that the last time I ran this particular screen, just over two months ago, there were 561 energy stocks traded publicly in the U.S., Canada and Europe. That number has since declined by 41 to 520 - partially as a result of bankruptcies that continue to impact the energy sector. On the flip side, last week Extraction Oil & Gas (NASDAQ: XOG) became the first exploration and production company to go public in two years.
I further narrowed the list by removing the stocks trading on the pink sheets, and by requiring a market capitalization of at least a $100 million and a minimum of $200 million in enterprise value (EV). This reduced the final list to 423 stocks.
The median Q3 total return among these was +3.9%. This was in line with the Energy Select Sector SPDR ETF (NYSE: XLE), which was up 3.5% for the quarter. At the top of the list was Resolute Energy (NYSE: REN), which saw huge gains during the quarter. Here are the top 10 Q3 performers:
EV - Enterprise value in millions of U.S. dollars, as of Oct. 14EBITDA - Earnings before interest, tax, depreciation and amortization, in millions for the trailing 12 months (TTM)FCF - Levered free cash flow, in millionsDebt - Net debt at the end of the most recent fiscal quarterQ3 Ret - Total shareholder return, including dividends, in Q3 2016
Notably, half of the companies on the list are coal producers. This is the result of the protracted slump that left coal stocks deeply marked down, in combination with the recent rise in natural gas prices that will result in some short-term shifting back to coal by power plants. Coal remains a poor long-term bet in my view, but there will be periods of outperformance even as the sector continues to shrink.
Seven of the top 10 Q3 performers trade on the NYSE, while Whitehaven Coal Limited is Australian, Hurricane Energy is based in the U.K., and Pennsylvania-based Corsa Coal trades on the Toronto Venture Exchange.
If we restrict the list to larger companies, let's say those with an EV of at least $10 billion, the list looks like this:
There is considerably more diversity among the larger top performers. This list contains many names that will be familiar to readers, as it includes some of the largest midstream companies as well as several major oil and gas producers. The one name on the list that may not be as familiar to readers is Neste, a Finnish oil refiner and marketer (and the cheapest company on the list based on EV/EBITDA). Neste is also the world's largest producer of advanced biofuel.
Many of the stocks on both lists are recovering from deeply oversold conditions, but their issuers are still suffering from low oil and gas prices - as evidenced by the number that still had negative free cash flow (FCF) last quarter. In fact, only 51% of the companies in my screen reported positive FCF over the past 12 months, but that number improved to 54% for the most recent fiscal quarter (which is Q2 in most cases, because most companies still haven't released Q3 earnings results.)
In the next article, I will focus on the top Q3 performers in the MLP sector.
As mentioned last week, if you happen to be in the Dallas area, I will be giving a short talk at the The MoneyShow Dallas on Oct. 19. I will provide a broad overview of the world oil markets, detail some of this year's big winners in The Energy Strategist and MLP Profits portfolios, and then talk a little about what I do in my day job as an energy engineer. I will be at the conference from the evening of the 18th through midday on the 20th, so if you happen to be nearby please stop in and say hello.