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.But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates and commodity prices), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 12.8% over the past six months. This performance is a noticeable divergence from the S&P 500’s 4.2% return.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three energy stocks best left ignored.
Transocean (RIG)
Market cap: $6.09 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 Are We Bearish on RIG?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.2% annually over the last ten years
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 37.6%
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Transocean’s stock price of $5.46 implies a valuation ratio of 23.1x forward P/E. Dive into our free research report to see why there are better opportunities than RIG.
Select Water Solutions (WTTR)
Market cap: $2.18 billion
Managing over 24 billion barrels of produced water annually across major U.S. shale plays, Select Water Solutions (NYSE: WTTR) provides water sourcing, recycling, disposal, and treatment services for oil and gas producers.
Why Are We Wary of WTTR?
- Smaller revenue base of $1.43 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 24.2%
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.6% for the last five years
At $16.88 per share, Select Water Solutions trades at 36.4x forward P/E. If you’re considering WTTR for your portfolio, see our FREE research report to learn more.
TETRA Technologies (TTI)
Market cap: $917.3 million
Operating across six continents with approximately 40,000 acres of mineral-rich brine leases in Arkansas, TETRA Technologies (NYSE: TTI) provides well completion fluids and water management services to oil and gas operators.
Why Do We Steer Clear of TTI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.7% annually over the last ten years
- Modest revenue base of $656.5 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Costly operations and weak unit economics result in an inferior gross margin of 29.3% that must be offset through higher production volumes
TETRA Technologies is trading at $6.18 per share, or 21.3x forward P/E. Read our free research report to see why you should think twice about including TTI in your portfolio.
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