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Pump Them Up

This screen finds energy firms with good long-term prospects despite short-term challenges.

John Zecy, 04/16/2013

In this issue’s stock screen, we look for attractive oil and gas companies that can rise above bearish criticism and provide lucrative growth opportunities.

Sector = Energy

Some investors have understandably strayed away from the energy sector because of the interplay of political, economic, technological, and natural factors that cause unsettling volatility. These conditions continue to shape the global oil and gas market and do not appear to be changing anytime soon. However, Morningstar’s equity analysts remain bullish on domestic natural gas and continue to see considerable upside to current gas prices. While oil and gas companies operate in an enormously complex and challenging business environment, we think periods of mediocre performance have caused investors to overlook companies with long-term growth prospects. To that end, we aim to look for energy names with superior asset quality that offer attractive discounts to our fair value estimates.

And ( Economic Moat = Narrow
Or Economic Moat = Wide )

Our analysts use the Morningstar Economic Moat Rating to describe a company’s ability to generate returns in excess of their cost of capital through the use of sustainable competitive advantages. Moats are typically earned through intangible assets, cost advantages, switching costs, network effects, and efficient scale. Asset quality, as measured by resource potential and per-unit production costs, is the biggest determinant of competitive position in the exploration and production space. Thinking about E&Ps in terms of economic moats can help cut through the short-term macro noise and identify which companies are best positioned for longer-term outperformance.

And PCF <= 12

While a firm may carry sustainable competitive advantages, we want to ensure that we are paying a reasonable valuation. Consequently, we set the cutoff at companies trading at less than 12 times their current price to cash flow.

And Morningstar Rating = 5

John Zecy is an associate equity analyst at Morningstar.

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