Whether you see them or not, energy businesses play a crucial part in our daily activities, from powering our homes and businesses to powering our transportation and industries.They are also bound to benefit from a friendlier regulatory environment with the “American energy dominance” stance of the Trump administration, and this excitement has led to a six-month gain of 25.4% for the sector - higher than the S&P 500’s 6.8% return.
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. On that note, here is one energy stock boasting a durable advantage and two we’re steering clear of.
Two Energy Stocks to Sell:
Transocean (RIG)
Market Cap: $6.73 billion
Operating one of the world's most capable fleets of ultra-deepwater drillships and harsh environment rigs, Transocean (NYSE: RIG) operates drilling rigs that energy companies rent to drill oil and gas wells in deep ocean waters.
Why Do We Think RIG Will Underperform?
- Sales tumbled by 4.7% annually over the last ten years, showing market trends are working against it during this cycle
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 37.9%
- Poor free cash flow margin of 4.6% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $5.13 per share, Transocean trades at 27.2x forward P/E. Check out our free in-depth research report to learn more about why RIG doesn’t pass our bar.
Core Laboratories (CLB)
Market Cap: $610.8 million
With roots dating back to the first commercial oil boom, Core Laboratories (NYSE: CLB) analyzes rock and fluid samples from oil and gas reservoirs to help energy companies optimize production and recovery.
Why Is CLB Risky?
- Sales trends were unexciting over the last five years as its 3.4% annual growth was below the typical energy upstream and integrated energy company
- Revenue base of $524.7 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Gross margin of 20.4% reflects its high production costs and unfavorable asset base
Core Laboratories is trading at $11 per share, or 1x forward price-to-sales. If you’re considering CLB for your portfolio, see our FREE research report to learn more.
One Energy Stock to Watch:
Kinder Morgan (KMI)
Market Cap: $69.77 billion
Operating what amounts to the toll roads of the energy industry, Kinder Morgan (NYSE: KMI) transports natural gas, refined petroleum products, and crude oil through its pipeline network across North America.
Why Is KMI Interesting?
- Massive revenue base of $17.53 billion makes it a household name that influences purchasing decisions
- EBITDA profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- KMI is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Kinder Morgan’s stock price of $33.20 implies a valuation ratio of 23.1x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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