👋 Howdy Partner,

Investing is simple. But not easy.

There are more than 50,000 stocks listed globally - which ones should you seriously consider?

Let's figure it out together.

Step 1: Find a Starting Point

We love to buy companies that return capital to their shareholders, but we don’t want to pay too much for them.

A good starting point? The Buy-Hold-Sell list.

But there are other ways to generate ideas:

• Stocks near their 52-week lows
• Underperforming sectors
• 13-F filings from investors you admire

Today, I’m looking at oil companies.

Why?

• Berkshire owns Chevron and Buffett has been buying more Occidental Petroleum.
• Several oil and gas companies came up when we looked at high-yield stocks.
• There were also several in the list of top dividend stocks.
• And TotalEnergies came up when we looked at European stocks.

When I see the same kinds of stocks popping up over and over, I know it’s time to dig deeper.

Let’s do that today.

Step 2: Pick The Most Interesting

To find the best ideas, you should try to find reasons to say ‘no’ as fast as possible.

For each company, ask yourself:

• Do I understand how the company makes money?
• Does this company interest me?
• Can I make an educated guess about where this company will be in 10 years?

If you say 'no' to any of those questions, move on to another company.

Our Companies

I’ve selected 5 companies involved in oil and gas that have come up in previous Compounding Dividends articles.

• Chevron
• ExxonMobil
• TotalEnergies SE
• Diamondback Energy
• Canadian Natural Resources

They fall into 2 groups:

1. Large, integrated oil companies (Chevron, ExxonMobil, TotalEnergies) - they do everything from exploration to refining and sales.
2. Upstream companies (Diamondback, Canadian Natural) - they extract and sell oil with minimal refining.

Step 3: Compare What’s Left

Let’s compare them.

We’ll assign points in each category.

The best-scoring stock is the most attractive company - simple.

Capital Allocation

We’ll start by looking at how management allocates capital.

Using the average ROIC for the past 5 years, we’ll give one point to any company with an ROIC > 8% (the average return of the stock market).

Every company but TotalEnergies gets a point here.

1 Point = Chevron (+1), ExxonMobil (+1), Canadian Natural (+1), Diamondback (+1)

0 Points = TotalEnergies SE

Dividend Growth

We want companies that will grow the dividend over time.

We’ll aware one point for companies with dividend growth rates >5% over both the 5 and 10 year time horizons.

The company with the best dividend growth? Canadian Natural Resources gets 2 points.

Chevron also earns a point for its 5-year dividend growth of 6.4%.

3 Points = Canadian Natural (+2)

2 Points = Chevron (+1), Diamondback (+1)

1 Point = ExxonMobil

0 Points = TotalEnergies SE

Balance Sheet

We also like strong balance sheets, especially when the industry is cyclical, like energy.

We’ll give one point for a Debt/Equity of 0.5 or less, and another point for Interest Coverage >10x.

These companies all have strong balance sheets. Every company gets 2 points.

The strangest balance sheets? Chevron and ExxonMobil.

5 Points = Canadian Natural (+2)

4 Points = Chevron (+2), Diamondback (+2)

3 Points = ExxonMobil (+2)

2 Points = TotalEnergies SE (+2)

Next we’ll dive into how these companies return capital to shareholders, how they’ve grown in the past, and how they’re expected to grow into the future.

Ready to see which company comes out on top?