Energy businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of energy prices and the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 1.5%. This drop was disheartening since the S&P 500 gained 7.2%.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. On that note, here is one resilient energy stock at the top of our wish list and two that may face trouble.
Two energy stocks to sell:
Calumet (CLMT)
Market cap: $4.36 billion
With roots dating back to 1919 and facilities strategically positioned from Louisiana to Montana, Calumet (NASDAQ: CLMT) refines crude oil into specialty products like lubricating oils, solvents, and waxes used in cosmetics, batteries, and industrial applications.
Why Is CLMT Risky?
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 7.2%
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Calumet is trading at $49.59 per share, or 9.9x forward P/E. Dive into our free research report to see why there are better opportunities than CLMT.
ProFrac (ACDC)
Market cap: $888.8 million
Operating one of the largest electric-powered fracturing fleets in North America, ProFrac (NASDAQ: ACDC) provides hydraulic fracturing services that help oil and gas companies extract hydrocarbons from underground shale formations.
Why Should You Sell ACDC?
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 32.1%
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 14.9 percentage points
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 3.7% for the last five years
ProFrac’s stock price of $4.99 implies a valuation ratio of 6.5x forward EV-to-EBITDA. To fully understand why you should be careful with ACDC, check out our full research report (it’s free).
One energy stock to watch:
Noble Corporation (NE)
Market cap: $7.82 billion
With origins dating back over a century to 1921, Noble Corporation (NYSE: NE) operates drilling rigs that oil and gas companies charter to drill wells in deep ocean waters and shallow seas.
Why Is NE Interesting?
- Impressive 28.9% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Economies of scale give it more fixed cost leverage than its smaller competitors
- EBITDA margin expanded by 9.9 percentage points over the last five years as it scaled and became more efficient
At $49.00 per share, Noble Corporation trades at 48.5x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
High-quality stocks for all market conditions
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