A few upstream oil companies outperform, despite cheaper crude

When crude oil prices decline, it is not of a major surprise when upstream oil companies are hit, as their main income stream is under pressure and it is an operational leverage play. But as I found using the Saxo Bank Stock Screener,some companies are more resilient even when the oil price drops. I have created a watch list where I am able to follow a group of upstream companies with a good set of properties, which makes them less dependent on the current risk on or risk off market. 

What happened in May to crude?
We have seen crude oil tumbling since early May, see chart 1, as several factors have created a headwind. The tensions with Iran have declined somewhat, and growth indicators from both Europe and Asian have not been encouragin lately. In total this has taken $20 off the crude price.

We are not really able to say if the situation will turn more around for the better in the short term. But that said, we probably need to get to an overall worse state before we can climb towards the highs. For this to happen, China and Asia needs to produce some macro surprises or governments need to open for more help to the struggling growth, or as we have seen a willing Chinese central bank lowering the rate. On top of this it would help if more viable solutions would appear to the European debt crisis, and if the US stops producing weak macro numbers. At the moment the markets are midstream and investors are not sure if the next move is to one shore or the other.

The good thing is the build of the screening makes the investments less dependent on the above solutions. There are other qualities which support the stocks even when the oil prices declines. Gravity is hard to avoid, but the selection shows good signs. The beta versus oil price is for all stocks less than 1 and the least is at 0.42, see chart 2.

As seen in chart 3, the selected stocks have all had a difficult period, but 7 out of 10 have managed to perform better than the oil market, which I credit the good fundamentals.

The selected companies
I have selected the oil and gas production as these are mostly exposed to the crude price. Secondly, I don’t want to pay too much for the company, and in this case it is set to be lower than S&P500 P/E. Thirdly I want the EPS to be increased both on a 3m and 1m horizon. The analysts’ evaluation of the business has been good for some time and even in the bad environment. Finally I need the stocks to have declined more than an overall index, in this case taken as S&P500.

Have a closer look at the selected companies, there might be one or more companies you would like to have on your monitor.  (If you don't have the full screener yet, you can try out a free version of the screener.)

Conclusion
The road ahead right now is not easy to figure out, so the screening here is built with the purpose of extracting quality upstream companies. This leaves them less exposed to the current oil swings (beta less than 1) but they are probable candidates to follow the oil price higher when this happens, as the quality will support them.