Unless you’ve been living under a rock for the past two years, you know that the energy sector has been hammered by overproduction and a moribund global economy.
Saudi Arabia decided to strike out at upstart competition in the U.S. shale fields, as well as an Iran that was looking to bring its oil back online. It also hurt the Russians and most other producers. The Saudis have mature fields where they can produce high-quality oil at low cost with little refining necessary.
When it flooded the market with cheap oil (it was barely breakeven for them) it was going to slam other energy producers.
Add to that, the global economy is still barely functional, with one-third of the world’s sovereign debt now drawing negative interest rates. That’s about $7 trillion dollars, and it was $0 two years ago.
The point is, there are some huge long-term issues in the energy patch, and many companies that were market darlings a few years ago are now barely keeping the lights on. We’ve picked seven energy stocks that will be left behind when oil finally makes a rebound.
Energy Stocks to Sell: Cheniere Energy, Inc. (LNG)
Cheniere Energy (LNG) was trading at $84 in late 2014. Today, it’s trading at $33. It’s down more than 50% in the past year.
This company became the poster child of liquid natural gas exporters. Even its ticker symbol advertised the fact.
It was supposedly going to make a killing when it opened the first U.S. LNG export facility in February. You see, while natural gas costs around $2 for every million BTU in the U.S., in Europe it’s in the mid-teens. And in Japan it’s closer to $20. That massive profit margin has investors salivating.
But none of this has spared the company from its other partnerships that are built to kick in 2% of their profits to LNG. The problem is, none of them are making money, which means LNG isn’t either.
Regardless of how quickly energy markets finally bottom, it’s going to be at least 2020 before LNG looks attractive.
Energy Stocks to Sell: CVR Energy, Inc. (CVI)
CVR Energy, Inc. (CVI) is off 55% year to date and isn’t done sliding.
The company primarily has two divisions: one is on the refining side, the other is in the fertilizer business. Neither sector has been in great demand recently and it’s now taking a serious toll on CVI.
While energy was cheap, refiners were busy converting oil into gasoline and other fuels and chemicals. Now they’re looking to unload the stockpile. And that will take a while, even with the summer driving season ahead of us.
And as the energy markets recover, it means CVI’s margins will be squeezed on refining moving forward. Plus, because it’s a relatively small player in the space, it doesn’t have the same capacity and distribution that larger players in the sector have.
That’s going to make a big difference on which of these firms come out of this … and CVI may not be one of them.
Energy Stocks to Sell: Kinder Morgan Inc (KMI)
Kinder Morgan (KMI) is one of the major midstream players in the energy patch, until the bottom fell out of the shale boom.
Midstream players are generally pipeline companies that operate like a toll booth for transporting gas and liquids from fields to refiners. KMI has been around for more than two decades and remains a dominant force, but when there’s slackening demand you don’t make as much on tolls to and from suppliers.
Another piece to this is most midstream players are master limited partnerships that pay out big dividends, as shareholders are considered business partners and a specific percentage of profits are regularly doled out. KMI has subsidiary MLPs that send a percentage of their operations up to HQ.
But KMI only has a stingy 2.8% dividend. And that’s after the stock has fallen. There’s no reason for this one when there are so many better stocks out there.
Energy Stocks to Sell: HollyFrontier Corp (HFC)
HollyFrontier (HFC) can’t win for losing. Off more than 50% from its highs last August, this mid-sized refiner can’t catch a break. And that’s a problem that the entire sector is having.
What makes it worse for HFC is that the the big refiners are better scaled to deal with significant downturns than smaller ones.
Smaller players are more leveraged to the profit margins in the refining business — cheap oil and decent retail prices means fat margins. As oil prices rise, it squeezes these margins and companies like HFC start to struggle.
Plus, they tend to overproduce in slack times, but then have to get rid of all that inventory before that can start making decent money again. The big refiners are positioned to endure this kind of volatility. HFC? Not so much.
Energy Stocks to Sell: Ensco Plc (ESV)
Ensco (ESV) is an offshore driller. And if it wasn’t bad enough that global demand is off and Saudi Arabia has oversupplied the market for two years now, now there’s an increasing destabilization in the oil patch in Africa, where ESV has a good amount of rigs in operation.
ESV is in the worst-hit piece of the energy sector, exploration and production. You see, E&P firms make hay while the sun shines. When the weather gets stormy their business gets stormy as well.
Most of the busts in the shale industry, for example, are E&P companies. Offshore drilling is also a challenge since it’s not likely the cheapest oil firms are producing and in lean times they will shutter production in the more expensive parts of production first.
It’s no surprise then than ESV has cut its dividend in the past year and the stock is off 55% in the same time frame.
Energy Stocks to Sell: Teekay Corporation (TK)
Teekay Corporation (TK) is the holding company for other specialized companies that all do a certain variation on a theme — they’re in the marine transport of energy business.
They ship LNG, liquid petroleum gas, oil, chemicals, etc., as well as provide logistical support for getting these cargoes from point A to point B.
A weak global economy and suppressed demand has put a hurting on this firm and its subsidiaries. Put it this way, not only is TK F-rated, but its sister firms Teekay Tankers Ltd. (TNK) and Teekay LNG Partners L.P. (TGP) are also F-rated stocks.
The only momentum on this is down. The stock is off 80%-plus in the past year; don’t buy this dip.
Energy Stocks to Sell: Weatherford International Plc (WFT)
Weatherford (WFT) is an oil field services company. That means when no one is pumping, it’s not making money. You can imagine that this isn’t the best time to be in the oil field services sector.
Plus, its competition is already out the other end of this slump, whereas WFT is still wallowing in it.
The stock is off 56% in the past year, which is a steep mountain to climb. Its best hope short term is if one of the two top firms look to buy WFT. But aside from that, there’s not much to buoy hopes.
Its recent bond issuance may well do more harm than good in the long run.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.