Whether it is with energy stocks, or any other sector, investors are often told to look for companies with strong balance sheets. Balance sheets include assets on one side and liabilities on the other. Generally speaking, more assets than liabilities is an easy litmus test by which to gauge financial health. It’s logical. Own more than you are responsible for and you’ll be better off. It applies to humans and corporations equally.
Strong balance sheets are often marked by ample cash as well. The more cash available, the more leverage a given company has in general. Energy firms with more equity than debt and ample cash are those that are financially healthiest. They’re also good choices for investment for those reasons.
Chevron (NYSE:CVX) is, in general, an excellent choice for investors considering adding energy stocks to their portfolios. It’s large, stable, provides income via dividends and is a great bet on the continued importance of oil to the economy.
Its strength is reflected in a strong balance sheet that suggests CVX shares continue to be a reasonable choice overall. So, let’s look at those numbers and what they tell us.
The most basic and informative metric for financial health is debt to equity. The lower the ratio, the better. Chevron’s debt on Sept. 30 stood at $20.559 billion. Equity stood at $165.265 billion. That equates to a debt-to-equity ratio of 12.4% which is very low relative to other firms in the energy sector.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) is very similar to Chevron in many regards. Most of the reasons an investor would buy Chevron also apply to Exxon Mobil. That includes a strong balance sheet as well.
Metrics-based website Gurufocus has a lot of quick and easy ratios at hand. The debt-to-equity ratio listed there for Exxon Mobil is 0.21. That places Exxon Mobil squarely in the top third of companies by that measurement. However, when I viewed Exxon Mobil’s balance sheet I found slightly different numbers for that ratio. Debt stands at $36.5 billion while equity sits at $207.5 billion. That equates to 17.5% suggesting that the company is slightly healthier than gurufocus states.
Whatever the case, the company’s cash balance increased by $3.3 billion during the most recent quarter and stands at $32.97 billion overall. Exxon Mobil is also in acquisition mode and finalized its acquisition of Denbury on Nov. 2 strengthening its low carbon solutions business overall.
Devon Energy (DVN)
Devon Energy (NYSE:DVN) is a North American E&P firm that is financially healthy overall. Among the three firms discussed here it’s the least healthy but overall is still in good shape.
Devon Energy is also unique relative to those firms for its dividend structure. The company pays a base plus variable dividend that rewards investors when operations are strong.
The primary reason Devon Energy is considered to be the least healthy among the firms discussed here relates to its cash position. Devon Energy doesn’t have much cash on hand and that makes its cash-to-debt ratio quite low overall. Outside of that metric, Devon Energy is financially strong. All of the other ratios I’ve discussed here are fine for the company.
The company carries $2.669 billion in long term debt which is much lower than the $11.15 billion of equity in the company. Devon Energy is a great choice for investors seeking variable income and financial health in an energy stock.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.