Energy investors that remain concerned about the possibility of a second economic contraction, but still want to have equity exposure, should look for companies with stronger balance sheets that are sure to emerge intact from a double-dip recession.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Many companies didn't survive the last recession as falling cash flows along with large and maturing debt loads took its toll on a number of public companies. The energy sector is particularly susceptible to this due to the cyclical nature of both the business and commodity prices.

Exploration and Production
Devon Energy (NYSE:DVN) has a solid balance sheet that has been enhanced over the last year with the proceeds of a large restructuring program initiated by the company at the end of 2010. This program involved the divestiture of offshore and international properties and netted approximately $8 billion in after-tax proceeds.

Devon Energy ended the second quarter of 2011 with $7.9 billion and $6.7 billion of cash and short-term investments, bringing net debt down to $1.2 billion. Devon Energy's net-debt-to-capitalization ratio of 5% is conservative and should lead to a less volatile stock price relative to more levered companies.

Evolution Petroleum Corporation (NYSE:EPM) goes one step further and has no debt on its balance sheet as of the end of the company's third fiscal quarter. Evolution Petroleum Corporation is active mostly in Texas and Louisiana and has the majority of its proved reserves and production from an enhanced oil recovery operation at the Delhi Field in northern Louisiana.

Diversified Energy
Unit Corp (NYSE:UNT) also has a better balance sheet than many of its peers, with a debt-to-capitalization ratio of 12% as of June 20, 2011. The company has nothing drawn on its credit facility and only one debt issue outstanding with a maturity date in 2021. Unit Corp is involved in exploration and production, and contract drilling and midstream, giving investors exposure to three separate areas of the energy complex.

Oil Services
Dril-Quip (NYSE:DRQ) has $79 million in debt and $250 million in cash as of the end of the second quarter of 2011, bringing this oil services company into a negative net debt position. Dril-Quip is a supplier of subsea products and equipment and has no leverage to the North American drilling cycle, which tends to be more cyclical during downturns than the offshore cycle.

The Bottom Line
Companies with little or no debt are usually safer plays during a recession, but investors should understand that the financial measures used above are incomplete as well as static and backward looking. A more comprehensive examination would involve additional measures of leverage and one that is prospective for the company's net cash flows over the next year. Also, during market panics, investors tend to sell off all stocks in a cyclical sector, regardless of individual fundamentals, which means there are few places to hide in the energy sector. (For additional reading, take a look at A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    The 5 Best Buy-and-Hold Energy Stocks

    Understand why energy companies' stock are volatile when oil prices are volatile. Learn about the top five energy companies to buy and hold.
  2. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Investing

    Oil: Why Not to Put Faith in Forecasts

    West Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
  6. Investing

    The Quinoa Quandary for Bolivian Farmers

    Growing global demand for quinoa has impacted Bolivian farmers' way of life. Should the American consumer be wary of buying this product?
  7. Markets

    How Energy’s Debt Bubble Affects Your Portfolio

    Depressed crude oil prices are here to stay for the foreseeable future. Here's how it will affect an oil industry riddled with unsustainable debt.
  8. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  9. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  10. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  1. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!