NEW YORK (TheStreet) -- Among energy companies, services stocks are among those whose fortunes are most deeply tied to the general economic activity that drives demand.
With forecasts pointing to continued robust economic growth out of China and various emerging market economies, the Philadelphia Oil Services Sector Index has soared 61% since the the trough of the recession in 2009. TheStreet Ratings Team says that energy demand could grow over 40% in the next two decades, with demand so robust that it almost outstrips supply.
However, generalizing where these economically-sensitive stocks could be going in the forseeable future would be a mistake, given the diversity of their locations and growth strategies.
"I think the way to look at these companies ... is by being specific about the location of their reserves and their operation," says Abudi Zein, vice president at energy data services provider Genscape.Another useful way to screen for the best -- or the most poorly situated services companies -- is by utilizing the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health to forecast the probability of it going bankrupt in the coming year. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies, according to Investopedia.
Generally, companies with a Z-Score higher than 3 are considered safe with little danger of bankruptcy, while those with a score of 1.81 or lower are considered distressed and more likely to go bankrupt. Anything in between is a grey area. The formula, again, is by no means an absolute measure of the company's health, but serves as a very useful screening tool. Using the Altman Z-Score, TheStreet has honed in on three services companies that may be at risk of distress -- all of them happen to be drillers. The formula also helped TheStreet identify an independent producer who could be at great risk of falling into distress despite its appealing revenue growth. Also, the Z-Score led to the identification of blemishes in one of North America's largest integrated companies. Analysis of these stocks by TheStreet Ratings team, also in the following pages, details the risky stories behind these companies. Here then, are a group of energy stocks that the Altman Z-Score looks upon with a skeptical eye ...
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