Energy businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But their prominence also brings high exposure to the ups and downs of economic and energy cycles. Luckily, the tide is turning in their favor as the industry’s 12.6% return over the past six months has topped the S&P 500 by 6.4 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. With that said, here is one resilient energy stock at the top of our wish list and two we’re passing on.
Two Energy Stocks to Sell:
Seadrill (SDRL)
Market Cap: $2.69 billion
Operating in water depths reaching 12,000 feet below the surface, Seadrill (NYSE: SDRL) owns and operates drillships and semi-submersible rigs that drill oil and gas wells in deepwater offshore locations.
Why Is SDRL Risky?
- Annual sales declines of 9.6% for the past ten years show its products and services struggled to connect with the market during this cycle
- Gross margin of 34.8% is below its competitors, leaving less money to invest in exploration and production
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Seadrill’s stock price of $42.97 implies a valuation ratio of 27.5x forward P/E. To fully understand why you should be careful with SDRL, check out our full research report (it’s free).
Granite Ridge Resources (GRNT)
Market Cap: $602.8 million
Operating without drilling rigs or field crews of its own, Granite Ridge Resources (NYSE: GRNT) owns interests in oil and natural gas wells across six major US shale basins.
Why Is GRNT Not Exciting?
- Annual revenue growth of 8.7% over the last four years was below our standards for the energy upstream and integrated energy sector
- Smaller revenue base of $455.6 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 33.2 percentage points
Granite Ridge Resources is trading at $4.63 per share, or 9.4x forward P/E. Read our free research report to see why you should think twice about including GRNT in your portfolio.
One Energy Stock to Watch:
Occidental Petroleum (OXY)
Market Cap: $54.64 billion
Backed by Warren Buffett's Berkshire Hathaway as a major shareholder, Occidental Petroleum (NYSE: OXY) explores for, develops, and produces oil, natural gas liquids, and natural gas, primarily in the United States and Middle East.
Why Could OXY Be a Winner?
- Market share has increased this cycle as its 6.1% annual revenue growth over the last ten years was exceptional
- Enormous revenue base of $21.45 billion provides significant leverage in supplier negotiations
- OXY is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
At $54.90 per share, Occidental Petroleum trades at 10.7x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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