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Drill Baby Drill: 8 Cash-Rich Energy Stocks

Stocks in this article: AAV DO ESV MHR PBR REXX SDRL VTG

James Dennin, Kapitall: We decided to take a closer look at 8 energy stocks to see who's in the energy business for the long haul. 

The US is on pace to overtake Russia as the world's largest energy producer this year, if it hasn't alreade done so. It's an important development that reflects the strength of America's energy boom. However, as we've reported in the past, most of this growth is not coming from the big name firms – the so-called "supermajor" oil companies that are household names.  

Read more on oil from Kapitall: The End of "Big" Oil?

Instead much is coming from smaller firms using improved technology to access vast deposits of natural gas through the use of hydraulic fracturing – also known as "fracking." And while the technology has been a boon of sorts to US energy productions, it has not spread as easily throughout the rest of the world. 

Environmental activists have stalled efforts to bring the practice to Britain, and Russia's energy giant Gazprom, along with many of the major oil-producing countries in the Middle East, still deal primarily in crude.

However, while the proliferation of hydraulic fracturing has considerably reduced America's energy exports – by 32% for natural gas and 18% for crude oil – it also comes with some problems. For one, there is wide-spread opposition in some areas among environmentalists and community activists alike.

They argue that natural gas is a terrible polluter because of supposedly higher methane emissions, and that it will continue American dependence on fossil fuels. So far,  a dearth of hard data on the matter has made resolving once and for all the dangers of "fracking" all that more complicated. 

America's drilling rivals have pointed to the spike in natural gas as simply a bubble. And while they may just be smarting from diminished revenues, as the world's largest energy consumer starts relying more and more on itself, there are some problems with natural gas:

  • It's very expensive to extract.
  • Smaller companies in particular often borrow a lot of money to keep up.
  • Huge amounts of capital investment are usually necessary. 
  • Firms must develop the off-shore wells or shale mines needed to access our own reserves.

Investing ideas

To see which firms are succeeding on this front, we decided to look for encouraging accounts receivable trends, a measure which  helps to gauge whether a company's quality of sales, not just the quantity, is increasing over time.

Specifically, we screened for names with strong sales trends relative to accounts receivable, and for increases in revenue that are outpacing increases in accounts receivable year over year. These trends are positive because accounts receivable is that not yet received, and there is no guarantee it will be received in full, so the smaller the portion of revenue and current assets, the better.

Companies with encouraging accounts receivable trends have a relatively clearer picture of their finances going into the future. This naturally makes it easier for them to invest and pay down debt, as well as serving as an indication that they are nurturing good relationships with reliable clients.

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