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3 energy stocks in the spotlight

Soon Beach Energy (ASX: BPT) and Drill Search (ASX: DLS) will be releasing their annual reports. Energy giant Santos (ASX: STO) just released its results. How should investors compare them to find the best prospect for their money?

Let’s start with revenue. Looking over the reports from 2009-2012, Beach Energy had an annual average 8% increase. Drill Search trumped that with 14% average annual growth, and Santos came in second with 13.8%. Next, let’s look at net profit after tax — what’s left after everything is paid. Santos pulls ahead here with stable growth, whereas both Beach and Drill Search had a loss in one year, although both are profitable now. We want strong and steady results.

Shareholder equity has increased steadily over the past 10 years for all three, so all get a tick there. Return on equity — the rate of return based on shareholder equity — tells a different story. Beach and Drill Search come in at a dead heat of about 7%, with Santos trailing behind at around 4%-5%.

Now, let’s review net profit margins — how much profit is realised on each dollar of revenue — has Drill Search leading the pack in the most recent year, but six out of the last ten years have seen net losses. There’s too much risk here for our money. Beach and Santos are neck and neck at mid- to high teens.

Next round is debt and balance sheet strength. BPT has a low 7% gearing ratio (debt to equity ratio) and solid current ratio (current assets/current liabilities) of 4.42. You want to see at least 1 in this stat. Drill Search stumbles with a 0.76 because it recently borrowed $100 million. Its 42.2% gearing isn’t a major concern. Santos has a sturdy 2 current ratio, and an acceptable 49.7% gearing. Winner: Beach Energy.

Up until now, we have just been comparing company performance and strength. Next up, the share price lightning round. Titanic Santos weighs in with a market cap of $14.04 billion. Its book value is $10.24 a share and current share price is about $14.50. It’s priced for good performance — a price to earnings ratio of 32 means investors are expecting a lot out of the near term. You’ll pay a premium to get in on this one.

Drill Search is the smallest of the three, clocking in at a $592 million market cap. Its book value is $0.55 a shared, but the current share price is about $1.35. Equally having a 32 PE, people are expecting greatness here, too, but the share could be severely punished if the company falters.

Lastly, Beach Energy has a more conservative 12.75 PE on its $1.78 billion market cap. Like a middle child, it’s hard to make out which way it will go. Surprisingly, Beach Energy’s current share price of around $1.35 is almost the same as its book value of $1.28.  Hardly a premium in sight. However, the company is expected to see smaller earnings over the next 2-3 years, so there’s a reason why.

Foolish takeaway

The biggest mistake that investors sometimes make is buying shares in a company they don’t understand. They can be attracted to hyped news titles, stunning profit increases, and get rich quick attitude stories. You can only get poor quickly.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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