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posted on 04 January 2017

Energy Supernovas

by Robert Rapier, Investing Daily

Investing Daily Article of the Week

With 2016 finally in the books, let's take a look back at the year's top energy stocks. I found them with 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. I developed it specifically for energy companies, compiling and analyzing metrics that you won't see in other screens.

I screened for energy stocks trading on U.S. and Canadian exchanges. That initial list totaled 1,207 tickers, so I removed those trading at less than a dollar per share, with an enterprise value (EV) of less than $100 million, or trading on the over-the-counter market. That reduced the list to 367 companies. I only mention this in case you know of a penny stock that soared during the year but didn't make my list.

From that list, here were the top 10 energy sector performers in 2016:

20170103TELtopstocks1

  • EV - Enterprise value in millions of U.S. dollars, as of Dec. 31

  • EBITDA - Earnings before interest, tax, depreciation and amortization, in millions for the trailing 12 months (TTM)

  • FCF - Levered free cash flow, in millions

  • CR - Current ratio, assets divided by liabilities

  • 2016 Ret - Total shareholder return in 2016

Most of those names are likely unfamiliar to energy investors, which is frequently the case with the year's top performers. The biggest winners are often the stocks of small, relatively unknown companies, including some in financial distress, that are not usually on the radar of most investors. This year's list includes three small coal producers and a hydraulic fracturing sand provider that I have mentioned in a couple of different columns here, along with the assorted drillers and explorers.

The most familiar name to readers is probably Clayton Williams Energy (NYSE: CWEI), a small oil and gas producer with holdings in the Eagle Ford shale and the prolific Delaware basin of West Texas. Readers may also be familiar with the top entry on the list, Resolute Energy (NYSE: REN), another oil and gas producer with Permian Basin holdings. Resolute went on a wild ride in 2016, starting the year at a little over $4 a share, falling and bouncing between $2.50 and $3 until mid-year, and then soaring to over $40 a share by year end.

The largest company on this list is hydraulic fracturing sand provider Fairmount Santrol Holdings (NYSE: FMSA), but its $3.6 billion enterprise value isn't even large enough to rank it among the top 100 energy companies by that metric.

For some names more familiar to readers, here were the best performers among the 50 largest energy companies:

20170103TELtopstocks2

Midstream companies make up more than half of this group, which is interesting considering that the midstream sector lagged the energy rally last year. I would also note that four of our portfolio holdings are on this list, including our top Best Buy in the Energy Strategist Growth Portfolio.

To appreciate the breadth of the energy sector's recovery in 2016, note that only two of the 50 largest energy companies cost shareholders money for the year. The top 40 all delivered positive returns. The average annual gain among the stocks of the 50 largest companies was 39.3%, and the 10 largest all had double-digit gains on the year:

20170103TELtopstocks3

Conclusions

The energy sector finally turned the corner in 2016. In contrast to 2015, the sector made sharp gains across the board. Subscribers to our newsletters benefited, as many of the year's best performers were among our recommendations throughout the year.

The midstream sector had some great performers, but on average lagged the broader energy markets. In the next issue I will highlight the best and worst performing master limited partnerships (MLPs) of 2016.

This month we will also review our market-beating annual portfolio returns in The Energy Strategist and MLP Profits. Consider subscribing for actionable advice that will help you profit in the energy sector in 2017.

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