In early May, we added a ‘Quality Score’ to highlight how strong companies are and if they will (A) thrive and be successful going forward, (B) survive the difficult times or (C) have problems to be concerned about. Going forward, in our monthly publications and Quarterly Reports, we will explain why we rated each company as we did.
Our SER Quality Scoring is made up of a number of parameters. We do not expect every metric to be covered by the rating but the majority of the metrics need to be met to end up in the three categories.
The scoring criteria includes:
- Insider Ownership – The higher the better. If there is low ownership that is a negative and selling is watched carefully.
- Hedge books – Is the company a successful hedger and in these uncertain times how far into 2020 and 2021 does their hedge book go?
- Balance Sheet – Do they have positive working capital, is debt low versus equity and is the direction down versus rising at the current time?
- Debt Maturities – Do they have debt maturing in the next year or so and do they have capability to roll it over or extend. If not is there a risk of default and then court protection if they do not get Federal Government support from one of their new lending programs from the EDC or BDC?
- Production Profiles – are they going to see production flattish this year or down 5-10% or down >10%?
- Free Cash Flow – Are they generating free cash flow to pay down debt and improve their balance sheet or not?
- Interest Coverage – Is their coverage ratio better than 6x or between 4-6x or below 4x?
- Debt/EBITDA – Is the ratio less than 2x, between 2 and 4x or is it above 4x?