Online Journal for the Moose Pond Investors Club

Evaluating Energy Stocks

Energy stocks are difficult to assess. The standard NAIC growth stock methodology does seem not work particularly well with energy companies since their revenues are driven in part by the pricing of the underlying commodity (oil or gas).

Kurt Wulff maintains the “McDeb” website which contains a weekly analysis of energy stocks. He was written up in Barrons earlier this year.

He has developed the McDep ratio which compares a company’s market value and debt to its present value. (“McDep” stands for market cap and debt to present value.) The ratio provides a useful way to compare energy companies and to assess relative market valuation.

In addition to preparing a weekly analysis called the “Meter Reader,” Kurt Wulff also profiles individual energy companies.

The site is free and does not require registration. The information on the site lags a week or two from when he provides it to his paying clients.

ChevronTexaco has a projected average return (PAR) of 10.4% and a quality rating of 64. More importantly, CVX has a McDep ratio of 0.77. This means that CVX is undervalued. A ratio of 1.0 would mean that ChevronTexaco’s market value and debt equaled its its present value. This McDep ratio calculation assumes $37 bbl oil. (This is a conservative assumption since futures contracts over the next six years are currently priced at $51 bbl.) See Wulff’s assessment of ChevronTexaco.

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