The Monday Edition- Key Metrics For Analyzing Energy Companies

By Yaser Anwar, CSC of Equity Investment Ideas

Originally I planned on writing about ‘The Oil Conundrum’, however I was unable to finish it in time for publishing (Super Bowl!).

So this week I’ll dispel the Key Metrics used when analyzing Energy Companies (for what its worth- I picked up these metrics while interning at JPM’s Energy Desk)

Key Metrics (for each Q, find the # vs. competitors)-

1) What is the reserve life vs. competitors? (short, long, the same?)

2) How sensitive is the company to shifts in Oil/NG prices?

For example: Hess has above-average sensitivity to movements in oil prices.

3) Which geographical area is future growth coming from- OECD, Asian and/or North American countries? And what % of upstream and downstream projects is located in these areas? How is the risk profile- does it make the earnings more volatile?

Note: High risk regions are OECD and high risk non-OECD regions are in Thailand, the JDA between Thailand and Malaysia, and Equatorial Guinea.

For example: Marathon’s production and reserve growth is more dependent on high-risk, deepwater exploration than the average industry participant. Marathon also carries above-average exposure to volatile, difficult to project refining margins.

4) How does the reserve life (short/long) stack up? Can the future value be calculated, and how far down (what is the terminal value assigned by The Street?)?

For example: Hess has a short reserve life (implying higher than average asset intensity)

5) Is the company’s outlook dependent on integrating recent acquisitions and/or execution of capital projects? Also, what is the hurdle rate and historical RoR on the capital projects?

For example: COP’s near-term outlook is dependent upon integration of the large upstream acquisition of Burlington Resources. Execution of MRO’s integrated gas strategy (i.e. Elba Island LNG), as well as large capital projects in the downstream, are keys to Marathon’s outlook.

6) Does the company have high, finding and development costs? (Important especially for E&P-only companies). How are the refining margins and rig utilization rates?

Once you get these numbers, compare them, not only to competitors, but to historical rates. Once historical comparisons have been established, then proceed to compare it to the company’s PE and one-year forward PE and EPS estimates. In my opinion, this will give you a gauge of whether it is being undervalued or overvalued or rightly valued.

I’ve tried to cover all aspects/key metrics necessary from my experience. If something has been left out or is incorrect, feel free to send me an email.

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