This year will be remembered for its global economic contraction. And while there’s hope that next year will see some improvement, another wave of coronavirus infections can potentially imply a double-dip recession and leave investors scrambling for stocks to sell.
Chris Williamson, chief business economist at HIS Markit believes that a lockdown will translate into another recession in Europe. Jeffrey Tucker from the American Institute for Economic Research believes that even the U.S. is facing a double-dip recession.
Given this outlook, the energy sector is likely to be in the watch list for potential stocks to sell. The sector has seen challenging times through the current year.
Another recession or sharp slowdown would imply more trouble for companies in the energy sector.
However, it’s not all gloom. Earlier this month, Pfizer (NYSE:PFE) and BioNTech SE (NASDAQ:BNTX) announced that their mRNA-based vaccine candidate was found to be more than 90% effective in preventing Covid-19. Moderna (NASDAQ:MRNA) has also announced that its vaccine is nearly 95% effective against Covid-19.
This is good news for the global economy. But the positive development will certainly not prevent the second wave of infections and the resulting economic impact.
Let’s discuss four oil stocks to sell if global GDP growth worsens and oil demand declines significantly.
- Marathon Oil (NYSE:MRO)
- Occidental Petroleum (NYSE:OXY)
- Northern Oil and Gas (NYSEMKT:NOG)
- Hess Corporation (NYSE:HES)
Stocks To Sell: Marathon Oil (MRO)
MRO stock plunged by 63% for year-to-date with Covid-19 hurting oil demand. However, the stock has been largely sideways in the recent past as the global economy crawls back to normalcy.
If there is another recession, MRO stock would be among the stocks to sell. West Texas Intermediate (WTI) oil price traded in negative territory earlier this year. Currently, WTI trades just above $40. I would not be surprised if WTI falls below $30 if oil demand declines again.
This is important to mention as Marathon Oil has a pre-dividend free cash flow break-even at $35 per barrel WTI. Post dividends, the break-even in at $37. Therefore, if oil does decline, the company will be free cash flow negative.
Marathon Oil is planning to deleverage in the coming quarters. Another recession would mean leveraging and possible suspension of dividends. Exploration and production growth plans would also be impacted. This would be negative for MRO stock.
At the same time, I would keep MRO stock in the radar. An oil and gas company with a FCF break-even below $40 per barrel is attractive.
Occidental Petroleum (OXY)
OXY stock would also be in my list of stocks to sell if Covid-19 hurts oil demand again. I believe that high debt is a key reason to be bearish on the stock.
For the third quarter, the company reported total debt of $38.5 billion. Another recession and decline in oil price would translate into several concerns.
- The company plans asset sale in the range of $2 to $3 billion for the coming year. This can be potentially delayed and will impact the company’s liquidity position.
- If oil prices fall sharply, the company’s EBITDA will decline. With the company’s annualized debt servicing cost in excess of $1 billion, debt servicing metrics will be negatively impacted.
- The company is also looking at organic cash flows and access to credit markets for future liquidity requirements. Cash flows will be stressed if oil trends lower. In addition, access to credit markets will also be challenging for a company with $38.5 billion in debt.
Even in a healthy growth scenario, I would consider companies with a healthy balance sheet. Chevron (NYSE:CVX) is a good example of a fundamentally strong name in the oil and gas industry.
Northern Oil and Gas (NOG)
Among the small-cap names in the energy industry, NOG stock would be a top stock to sell if oil declines. NOG stock, which currently trades at a market capitalization of $215 million, has declined by 80% for the year. Another round of correction is likely on global growth concerns.
It makes sense to avoid leveraged companies when the economic outlook is uncertain or oil can potentially trade sideways to lower. As of September, Northern Oil and Gas reported total debt of $983 million. This implies a net debt-EBITDA ratio of 2.7.
Leverage is therefore high for this micro-cap stock. Another downturn would imply higher credit stress. As of the third quarter, the company reported $1.8 million in cash. An undrawn credit facility of $571 million provides liquidity buffer. However, if the facility has to be utilized, leverage would increase further.
Debt and slowdown concern aside, Northern Oil and Gas has quality assets. If WTI oil trades in the range of $45 to $50 in 2021, the company can generate healthy FCF. I would therefore keep NOG in the investment radar. Once the potential double-dip recession headwind is navigated, some exposure to the stock can be considered.
Hess Corporation (HES)
HES stock outperformed other energy stocks mentioned here. For the current year, the stock has declined by 35%. However, if oil demand declines, I expect a sharp correction for the stock.
An important reason is the company’s aggressive investments even during this period of uncertainty. For the first nine months of 2020, the company reported operating cash flow of $847 million. For the same period, investments were $1.8 billion. This implies a negative free cash flow of nearly $1 billion.
As a result of aggressive investments, the company’s total debt increased to $8.3 billion as of the third quarter from $7.1 billion last year. The debt-capitalization ratio stands at 55.3%. If global GDP growth remains robust, growing debt is not a concern.
However, if the second wave of Covid-19 does result in a double-dip recession, HES stock will decline. Higher debt and potentially shrinking cash flows would worsen credit metrics significantly. Therefore, HES stock will be in my list of stocks to sell if oil demand slumps.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.