How to Pick an Oil Stock

Below is a list of five major integrated oil companies and their corresponding P/E ratios.

Oil Price Ratios
Company	P/E
ConocoPhillips	12.4
Exxon Mobil	12.2
BP	10.3
Chevron	10
Marathon Oil	7.5

If you want to dig deeper into a company's finances, profitability ratios aren't a bad way to go. By their very nature, these measures are excellent for comparing how companies utilize their assets to generate income. Mian endorses using the return on average capital employed, or ROACE.

To calculate ROACE, divide earnings before interest and taxes, or EBIT, by average total assets minus average current liabilities. Here's the same list of companies and their corresponding ROACE percentages.

Oil ROACE
Company	ROACE
Marathon Oil	42.20%
Exxon Mobil	41%
Chevron	31.60%
BP	26.90%
ConocoPhillips	26.30%

Watch Out for Cyclical Red Flags

Two major themes have popped up in the last few years that are dictating terms in the energy industry. One is refining margins, which wax and wane as demand for gasoline and heating oil changes with the seasons. The second is the weather, which can be a major determinant of profitability for companies with large exploration and production businesses.

Paying attention to these issues and adjusting investment positions accordingly can go a long way toward your success as an energy investor.

Integrated oil companies, by their very nature, have operations in the upstream (exploration and production) and downstream (refining, selling and distribution) businesses. However, their resource allocation among these businesses can vary significantly.

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