While most of the market was down in 2022, the energy sector had a banner year. The sector posted a whopping 59% gain on the back of rapidly rising oil and gas prices, which were driven by high demand amid the economic recovery from the Covid-19 pandemic as well as supply constraints caused by the Russia-Ukraine war.
Although David Meats, the director of energy research at Morningstar, says it is unlikely the sector will match the exceptional performance again this year, it has recorded a gain of around 1.97% so far in 2023.
As such, investors may be interested in potential opportunities among energy companies that qualify for Benjamin Graham’s Lost Formula screen, a Premium GuruFocus feature.
Prior to his death in 1976, the legendary investor who authored "Security Analysis" and "The Intelligent Investor" developed a refined formula that screened for companies with a price-earnings ratio of less than 10 and an equity-to-asset ratio of at least 0.5. The formula got its name from the fact he was unable to publish it before his passing; therefore, it was lost from public knowledge for a time. Since Graham also prioritized a minimum interest coverage of 5 with the companies he invested in, that element was included in the criteria as well.
A backtest of the strategy from 1926 to 1976 showed it would have outperformed the Dow benchmark by approximately twice as much.
The screener found companies with market caps above $1 billion that met the criteria as of March 2 included Exxon Mobil Corp. (XOM, Financial), Chevron Corp. (CVX, Financial), ConocoPhillips (COP, Financial), EOG Resources Inc. (EOG, Financial) and Pioneer Natural Resources Co. (PXD, Financial).
Exxon Mobil
Exxon Mobil (XOM, Financial) has a $453.06 billion market cap; its shares were trading around $111.19 on Thursday with a price-earnings ratio of 8.39, a price-book ratio of 2.33, a price-sales ratio of 1.18 and an equity-to-asset ratio of 0.53.
Founded in 1999, the Irving, Texas-based company explores for, produces and refines oil and gas. It has operations around the world.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past financial performance and analysts’ future earnings estimates.
At 85 out of 100, the GF Score indicates the company is expected to have good outperformance potential, driven by high ratings for profitability, financial strength and growth. The GF Value and momentum ranks, however, were more moderate.
Of the gurus invested in Exxon Mobil, First Eagle Investment (Trades, Portfolio) has the largest stake with 0.33% of its outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, the T Rowe Price Equity Income Fund (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) also have notable holdings.
Chevron
Chevron (CVX, Financial) has a market cap of $309.82 billion; its shares were trading around $162.49 on Thursday with a price-earnings ratio of 8.89, a price-book ratio of 1.95, a price-sales ratio of 1.32 and equity-to-asset ratio of 0.62.
The integrated energy company, which is headquartered in San Ramon, California, has exploration, production and refining operations worldwide.
According to the GF Value Line, the stock is modestly undervalued currently.
Further, the GF Score of 87 implies the company has good outperformance potential. While its ratings for financial strength, profitability, growth and GF Value were high, the momentum rank was more moderate.
With an 8.43% stake, Warren Buffett (Trades, Portfolio) is Chevron’s largest guru shareholder. Other top guru investors include Fisher, Simons’ firm and Diamond Hill Capital (Trades, Portfolio).
ConocoPhillips
ConocoPhillips (COP, Financial) has a $131.37 billion market cap; its shares were trading around $107.79 on Thursday with a price-earnings ratio of 7.43, a price-book ratio of 2.75, a price-sales ratio of 1.78 and an equity-to-asset ratio of 0.51.
The Houston-based oil and gas producer has operations in the U.S., Norway and several countries in the Asia-Pacific and Middle East regions.
Based on the GF Value Line, the stock appears to be modestly undervalued currently.
The GF Score of 89 suggests the company has good outperformance potential on the back of high ratings for four of the criteria and middling marks for momentum.
Dodge & Cox is ConocoPhillips largest guru shareholder with a 1.19% stake. The stock is also being held by Fisher, Diamond Hill, the Smead Value Fund (Trades, Portfolio), Yacktman Asset Management (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Elfun Trusts (Trades, Portfolio) and many others.
EOG Resources
EOG Resources (EOG, Financial) has a market cap of $71.11 billion; its shares were trading around $120.99 on Thursday with a price-earnings ratio of 9.16, a price-book ratio of 2.09, a price-sales ratio of 14.13 and an equity-to-asset ratio of 0.69.
The oil and gas producer headquartered in Houston has operations in the Permian Basin of West Texas, along with the Eagle Ford and Bakken plays.
The GF Value Line suggests the stock is modestly undervalued currently.
The company also has high outperformance potential based on a GF Score of 93, receiving high marks across the board.
Holding a 0.50% stake, PRIMECAP Management (Trades, Portfolio) is EOG Resources’ largest guru shareholder. Nygren, the T Rowe Price Equity Income Fund (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio) also have large positions in the stock.
Pioneer Natural Resources
Pioneer Natural Resources (PXD, Financial) has a $49.22 billion market cap; its shares were trading around $209.45 on Thursday with a price-earnings ratio of 6.74, a price-book ratio of 2.19, a price-sales ratio of 2.13 and an equity-to-asset ratio of 0.63.
The Irving, Texas-based oil and gas company has operations in the Cline Shale, which is part of the Spraberry Trend in the Permian Basin of West Texas.
According to the GF Value Line, the stock is modestly undervalued currently.
Raking in high ratings for all five categories, the GF Score of 93 means the company has high outperformance potential.
With a 2.13% stake, PRIMECAP is the company’s largest guru shareholder. Other top guru investors of Pioneer include Barrow, Hanley, Mewhinney & Strauss, Yacktman Asset Management (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio), Fisher, Stanley Druckenmiller (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
Other potential opportunities
Additional stocks that made the screener included Diamondback Energy Inc. (FANG, Financial), Coterra Energy Inc. (CTRA, Financial) and Marathon Oil Corp. (MRO, Financial), along with recent additions Ovintiv Inc. (OVV, Financial) and International Seaways Inc. (INSW, Financial).
