Energy stocks can’t seem to get a break.
Yesterday, the sector really took it on the chin as oil prices once again dropped. That sub-$40 per barrel price for crude oil is making fools of us all.
But it’s also creating some interesting bargains, as many energy stocks continue to trade solely on the price of crude oil and natural gas. The broad-based Energy Select Sector SPDR (XLE) is still down 18% over the last 52 weeks.
But how can you tell the “lunkers” from the losers?
Here are five of the most active energy stocks this week and whether or not they could be worth scooping up of the ground.
Energy Stock Lunker — Energy Transfer Equity LP (ETE)
As one of the largest pipeline-focused energy stocks, you’d think things would be going great for Energy Transfer Equity LP (ETE). Well, the once mighty midstream king has been suffering. ETE is down nearly 48% this year.
The reason has been its complicated merger deal with rival Williams Companies Inc (WMB). As energy prices and share prices for both energy stocks have fallen, it has added a huge level of uncertainty and complexity to the deal. Additional equity and debt raises have been necessary to sweeten the pot. The deal is now considered a nightmare by several analysts, and with no way to back out of it, ETE has suffered under the additional financing requirements.
However, ETE might end up being a lunker over the long haul. If the deal can be completed in a relatively cheap and cost-effective manner, the combined company would be midstream behemoth. Investors may want to consider the energy stock for their portfolio on the dips.
Energy Stock Loser — Chesapeake Energy Corporation (CHK)
The ills facing Chesapeake Energy Corporation (CHK) aren’t new. Like many energy stocks, CHK inflated itself full of debt in order to become one of the biggest natural gas frackers. That was fine when natural gas prices were high. But this is now, and CHK continues to get crushed under the weight of its own debt.
After a short-term rally in shares of CHK, investors and traders have once again realized that many of the same problems facing CHK are still there. Cash flows remain weak, debt levels remain high. The resumed drop in energy prices has only helped underscore that fact. The bankruptcy risk is very real. The bond market thinks so, with many of the energy stock’s bonds prices at just 50 cents on the dollar.
With many of the risks still at hand for CHK, the time to bid adios to the loser could be now … especially considering many of the other energy stocks on this list that are available for bargain-hunters.
Energy Stock Lunkers — Devon Energy Corp (DVN)
Devon Energy Corp’s (DVN) problems are similar to many energy stocks, which has caused the stock to drop 24% year to date. However, unlike CHK, DVN may be worth picking up off the ground.
During the last natural gas bust, DVN reinvented itself from being a pure player in fuel to a more diversified energy stock. That meant picking up plenty of oily acreage in the ultra-low-cost Permian Basin. That low-cost play, as well as moves to lower CAPEX spending and increase efficiencies, has been paying off for DVN. The firm is one of the few energy stocks that are still profitable. In fact, DVN managed to see a 41% increase in its cash flows quarter-over-quarter and record oil production.
Energy prices have taken a slight dip lower, so traders are betting that DVN won’t be able produce similar eye-popping results. But it doesn’t have to. Any continued profits are a welcome sign that DVN is going to stick around through the current market malaise. Any oil- or natural gas-price-related dip could be seen as a way to snag shares of this potential energy stock lunker.
Energy Stock Loser — Denbury Resources Inc (DNR)
Denbury Resources Inc (DNR) isn’t one of the “worst” energy stocks out there, per se. It’s actually kind of a cool play. But it just doesn’t make any sense to own DNR in the current environment.
Denbury isn’t really a traditional E&P firm. The energy firm is a specialist in enhanced oil recovery using CO2 injection. Denbury will buy up older wells and fields, inject them with carbon dioxide, then collect any extra oil that is pushed up from the well.
That’s great when oil is trading at $90 per barrel. Not so much at sub-$40. Thanks to the costs of doing this, DNR is very unprofitable at these levels, which helps explain why shares are down 71% over the last year.
With oil stuck in a tight trading range, DNR has become a proxy for oil prices as investors flip it on the hopes of recovery. But with “lower for longer” becoming a real trend, DNR could be suffering for a long, long time.
It’s best for investors to stay away from this “loser.”
Energy Stock Losers — SeaDrill Ltd (SDRL)
If enhanced CO2 doesn’t make sense at current prices, then deepwater drilling certainly does not. That’s hurt all the energy stocks providing the rigs necessary to do so.
And SeaDrill Ltd (SDRL) could be one of the biggest losers.
Day rates for rigs have already crashed to survival levels, so things for SDRL and its rivals are already pretty bad … but they are getting worst. CAPEX spending at major energy stocks continues to get cut and the glut of rigs is only hurting the deepwater driller’s positions even further. As one of the most heavily indebted drillers, SDRL is particularly vulnerable to the continued downtrend in oil prices.
That could make this energy stock a big-time loser for investors as lower prices keep on keepin’ on.
As of this writing, Aaron Levitt did not own any of the aforementioned stocks, but was long the Vanguard Energy ETF (VDE).
