Musings: Barron's and Fortune Rankings of Energy Companies
Barron's newspaper recently released its 2009 Barron's 500 company rankings that had a reasonable representation of energy companies. At about the same time, Fortune magazine published its rankings of the top 500 companies. The two rankings are based on different measures of financial performance. The sharp reversal of fortunes for energy commodities and the stock market during the second half of 2008 had contributed to energy companies not ranking as highly for the latest year, but still demonstrating better performance over longer time frames.
Barron's ratings are prepared by HOLT, a unit of Credit Suisse (CS-NYSE), and employ three equally weighted measures to grade and rank the largest companies by sales in the U.S. and Canada that trade on U.S. stock exchanges. For each company, HOLT calculates the median return on investment based upon cash flow for the past three years, using a proprietary cash-flow-return metric called CFROI that strips out the effects of inflation and adjusts for accounting distortions. HOLT also calculates CFROI in the latest fiscal year compared with the three-year median, sales growth in the latest fiscal year, adjusted for acquisitions and divestitures. Each company is graded in the three categories. The top quintile in each gets an A, the bottom an F. HOLT then calculates a total grade-point average, or GPA, for each company, with 4.0 being the highest. Ties are broken using CFROI in the latest fiscal year compared to the three-year median. In recognition of the current economic environment, this year's Barron's 500 ranking excludes companies operating in bankruptcy and those effectively nationalized by the U.S. government.
In the 2009 Barron's 500, there were 37 companies that are oilfield service, exploration and production, international oil companies or refiners. We found another 36 companies that are engineering companies that do a lot work in the energy industry, master limited partnerships of largely energy midstream businesses or gas utilities. Collectively, these 73 companies represent about 15% of the 500 companies ranked in the Barron's survey.
The table below shows the 37 companies we elected to focus on as most reflective of the energy sector. Interestingly, there were three companies with 4.00 GPAs compared to four last year. Of this year's top-ranked companies, two were ranked in the top group last year with one new company this year -- Cameron International (CAM-NYSE).
It was quite interesting to see how companies in both the 2009 and 2008 surveys moved within the rankings. Five companies were listed in the 2009 survey that did not appear in the 2008 survey. Equally interesting was that 18 companies in this year's survey ranked lower than they did last year, while 16 companies were ranked higher. The most dramatic change may have been for McDermott International (MDR-NYSE) that went from 10th place in 2008 to 268 this year. That performance reflected the dramatic change in the health of the offshore construction and power markets experienced by McDermott.
Overall, the energy companies performed well, mostly ranking in the upper half of the 500-company universe. In fact, only nine companies were in the lower half of the survey. There were no energy companies falling into the bottom quartile of the survey universe, again reflecting the strong industry environment experienced over the past three years, despite the second half of 2008 collapse. Given the deteriorating energy industry fundamentals and the weaker current financial performance of companies, it will be interesting to see how many and where energy companies rank in the 2010 survey.
The Fortune magazine rankings focuses on the largest companies in the United States based on various measures. At the time the survey was published, much was made about ExxonMobil (XOM-NYSE) reclaiming the top spot based on market value. There were only two energy companies in the top 20 ranking by market value with Chevron (CVX-NYSE) joining XOM. When ranked by equity, those two energy companies were joined by ConocoPhillips (COP-NYSE). No energy company was in the top 20 based on number of employees, not surprising given the nature of the energy business. When companies were ranked by other measures of revenues, the participation of energy companies declined. There was only one energy company in each of the categories: revenues per dollar of assets and revenues per dollar of equity. There were, however, nine energy companies in the revenues per employee category.
In terms of growth in profits and revenues, energy companies demonstrated the impact of the second half of 2008 collapse of its business. For example, there were three companies ranked in the top 20 measured on growth in profits for one year, but there were four for the five-year measure and five companies in the 10-year period. Likewise, there were four companies in the top 20 in growth in revenues for one year; six for the five-year measure; and eight in the ten-year period. The impact of the 2008 energy and stock market was most noticeable in the total return to shareholders measure where there were no energy companies in the one-year measure; seven in the five-year period; and six in the ten-year listing. Four of the companies in the ten-year ranking also were in the top 20 companies for the five-year ranking.
The sharp reversal of fortune for energy last year and continuing this year, and likely next, will impact how energy companies fare in the rankings next year. While it is impossible to predict now, we would expect there may be one-third to a half the number of ranked companies in the 2010 survey. However, just as the energy fundamentals reversed quickly last year, they could just as easily shift back into a bullish scenario later in 2009 or in 2010. The future of energy will depend on the health of the global economy and how consumers fare financially over the next six to 12 months not only in the OECD countries but in the developing economies of the world, also. Once again the fortunes of the energy business will depend on demand growth with growing crude oil and natural gas supply challenges playing a key supporting role.
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