The past few years have been a wild, mostly horrible ride for energy stocks and oil prices. Still, after sinking to lows not seen since the Great Recession, oil did claw its way back as drilling activity waned. The oil glut began to dissipate, and energy stocks finally moved in a positive direction. Heck, year-to-date, energy stocks — as measured by the Energy Select Sector SPDR (NYSEARCA:XLE) — are up around 13%.
But you might want to keep the celebrations to a minimum.
According to the International Energy Agency, the slowdown in oil demand growth is being met with rising inventories and supplies. The so-called glut is back — and could stick around until the middle of 2017. That report sent barrel prices for West Texas Intermediate crude back into the lower $40s.
A few weeks ago, that figure was approaching $60.
Under the new pricing scenario, we’re right back in the pits. And while many of the strongest energy firms have adapted to survive low-price oil, many energy stocks are dropping. And several of them aren’t anywhere near a floor.
Energy investors might be considering buying a few dips here in the coming days. These are seven energy stocks you should absolutely not consider picking up — and in fact, if you own them, consider getting out before things get much worse.
Energy Stocks to Sell: Chesapeake Energy (CHK)
By all accounts, Chesapeake Energy Corporation (NYSE:CHK) is finally starting to fire on all cylinders. That’s because it’s making serious headway on its huge debt.
If you haven’t heard the story before, during the go-go years of fracking, former CEO Audrey McClendon loaded Chesapeake up with debt to make it into one of the biggest natural gas drillers in the nation. However, as prices dropped, that debt became a major problem and almost bankrupted the firm.
Since then, CHK has been clawing its way back to the top.
But part of that clawing and success at debt reduction has come from higher oil and natural gas prices. Higher prices have simply meant higher cash flows — you’d see the same thing at just about any energy company, competent or not.
With prices once again dropping, those cash flows simply won’t be there.
Analysts at FBR agree, and have gone so far as to give Chesapeake a price target of zero. Yes, zero. FBR says the company’s “hole still appears too deep to dig out of.” CHK shares have fallen more than 20% since their 52-week peak 11 months ago, and they’re off more than 75% from their 2014 highs.
Sustained lower oil and nat gas prices will only send Chesapeake lower. If you hold CHK from here on out, it should be for short-term trades.
Energy Stocks to Sell: Seadrill (SDRL)
It’s no secret that deepwater drillers have been especially hard hit by the oil price downturn. So it should be no surprise that they’ll be killed again as oil prices drift lower.
Seadrill Ltd (NYSE:SDRL) has suffered to the tune of 90% since the oil rout began nearly two years ago.
More could be on the way.
SDRL operates one of the most technologically advanced drilling fleets in the sector. The problem is that operating and renting one of its jack-ups and semisubmersible rigs is ungodly expensive. For ultra-deepwater drilling to work, you really need prices for oil in triple digits — certainly not in the $40s.
Seadrill already has fallen victim to canceled contracts and unprofitable day rates. With oil dropping again, many energy firms will think really hard about doing any sort of deepwater drilling in the near future. That’s detrimental to Seadrill’s health.
That’s detrimental to Seadrill’s health, as the firm is racing against time with regard to its high debts. Seadrill simply can’t afford low oil for much longer, and it could be headed to the basement if things don’t change.
Energy Stocks to Sell: Marathon Oil (MRO)
Since spinning out its refining operations, Marathon Oil Corporation (NYSE:MRO) hasn’t exactly been hitting gushers in recent years. The firm has continued to feel the heat of lower oil prices as it has shifted its strategy into a high-flying shale driller.
Operations in the Bakken and Eagle Ford have been poor as its acreage isn’t exactly top-notch. That poor acreage and lower overall energy prices have caused Marathon to rack-up continued losses over the last few quarters. This past quarter, MRO managed to lose $196 million or $0.23 per diluted share. Additionally, cash flows at the energy stock have suffered in the wake of the lower prices and production.
In order to plug the gaps, MRO has undertaking some big time asset sales to raise cash for drilling and debt reduction. Since last summer, Marathon has announced and closed on more than $1.3 billion worth of asset sales. That’s more than the billion it hoped to raise. And that greater amount wasn’t because there was bidding war, it just needed to sell more. It has some pretty big debts coming due sooner than later.
With oil dropping further, MRO could find that it needs to sell more assets or shares to keep on truckin’. The loss recorded in the second quarter was actually during the period of rising oil prices. As it’s dropped further, cash flows and profits could remain elusive.
For investors looking for bargain energy stocks, MRO still might more room to fall.
Energy Stocks to Sell: FMC Technologies (FTI)
When you are one of the few energy companies that sell specialized equipment for a specialized area of oil production, you’re not going to do well when oil prices hit the ground.
FMC Technologies, Inc. (NYSE:FTI) knows this all too well.
FMC sells “Christmas Trees” — well, Enhanced Horizontal Christmas Trees, to be specific. These huge devices are used in offshore and deepwater drilling, sitting on the floor while they monitor and control the production of a subsea well. Without them, production in the Gulf of Mexico, the North Sea and so on just doesn’t happen.
And FMC used to sell a ton of them.
But will oil dropping like a stone and dropping again, sales of Christmas Trees have started to suffer. FMC’s full-year earnings and income tanked by double digits year-over-year. Earnings and revenues have slipped by double digits versus a year ago. FTI shares are off by more than half since their 2014 highs.
FMC Technologies is not a bad company. This isn’t a case of bad management. This isn’t a case of crippling debt.
The problem right now is competition.
The next two biggest players in subsea equipment are Schlumberger Limited (NYSE:SLB) and General Electric Company (NYSE:GE). Both have wide energy product offerings and can afford to wait out the market. As a prime subsea player (and not much else), FMC is at the mercy of oil prices. FMC has shacked up with oil services rival Technip via a merger creating a $13 billion company. But this combined entity still is heavily focused on offshore and subsea products, not a broad energy spectrum.
Thus, if oil keeps dropping, FTI probably will, too.
Energy Stocks to Sell: Whiting Petroleum (WLL)
“Always a bridesmaid, never a bride” should be Whiting Petroleum Corp’s (NYSE:WLL) corporate motto. The firm has been playing second fiddle in the prolific Bakken shale for years now. It’s good, but not the best. Costs were low, but not the lowest. When oil prices were high, that didn’t seem to matter — Whiting was constantly brought up as a buyout target.
But when oil prices drop, Whiting is awfully darn good at dropping.
Like many smaller energy stocks, WLL lives off credit cards. Debt is in the billions. Cash is in the tens of millions. Whiting has executed asset sales, and made big repurchases of its convertible notes and bonds to try to rectify the situation. Rising oil prices did fix things for a while, but those asset sales choked off future cash flows while declining oil prices are hurting current ones.
As a result, Whiting is dwindling as the glut returns. In the end, Whiting might survive, or it might get bought out. But its share price will take a walloping before it finally rebounds.
Don’t hold your breath for help to drop from the sky. It could be a long, painful wait.
Energy Stocks to Sell: Denbury Resources (DNR)
Some energy stocks just can’t catch a break.
Denbury Resources Inc (NYSE:DNR) continues to fluctuate on oil prices, and that’s because of the type of drilling it does.
Denbury uses enhanced oil recovery with CO2 injection. Essentially, the firm buys up older wells and fields from companies like Exxon Mobil Corporation (NYSE:XOM), inject them with carbon dioxide, then collect any extra oil that is pushed up from the well. It’s expensive, but it’s a business, as long as oil is elevated to a certain point. Even though oil still was far out of triple digits, DNR was doing just fine while it was on the upswing.
But the recent drop has crushed Denbury once more. It simply isn’t profitable at these levels. And with oil expected to fall even further over the next few months … things look grim for DNR stock.
In the end, Denbury is a great reminder that no matter how great a technology you have, fundamentals rule the roost.
Energy Stocks to Sell: Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP)
In this case, you’re doing a little buying to do some selling.
Let me explain.
The best way to profit from falling oil prices in the short run is to bet the farm against all energy stocks. After all, while many companies will be able to survive, that doesn’t mean their stocks won’t suffer too. Fundamentally sound or not, energy stocks should go lower as oil prices do.
With that in mind, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSEARCA:DRIP) could be a great trade.
By using futures and swaps, DRIP offers three times the daily inverse exposure of the uber-popular SPDR S&P Oil & Gas Explore & Production ETF (NYSEARCA:XOP). The XOP is a fund that holds energy stocks that drill for oil or natural gas. Thus, by using DRIP, you’re shorting a basket of energy stocks with a huge amount of leverage — and without the margin account risks. Invest $500, and the most you could lose is the $500, whereas by shorting the XOP, you’d actually have infinite loss potential (if it skyrockets).
But what you do lose, you could lose in a hurry. The day the IEA made its announcement, the DRIP exchange-traded product surged 13%. But it has suffered plenty of other swings in the opposite direction. Plus, thanks to the daily reset, DRIP doesn’t really track XOP faithfully in the long run — so depending on how it happens, an overall decline in the XOP, over time, probably won’t result in a perfect 3x gain. Those returns could be muted. On the flip side, losses could be exaggerated.
Still, with oil falling hard in recent weeks, DRIP has been a good bet. Just remember: DRIP is a trade, not a buy-and-hold, and should only be done with a small portion of money from the speculative part of your portfolio.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
