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

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  2. Stock Analysis

    The Top 5 Oil and Gas Penny Stocks for 2016 (XCO, CHK)

    Learn more about the oil and gas industry outlook, and discover the top five oil and gas penny stocks investors should consider for 2016.
  3. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  4. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  5. Stock Analysis

    3 Volatile U.S. Industries to Exploit in 2016 (VRX, IBB)

    Read about volatile sectors in the stock market that may provide opportunities for investors in 2016, including energy, mining and biotechnology.
  6. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  7. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  8. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  9. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  10. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center