As many remember, both in their minds and pockets, Brent crude prices reached a decade-high last year, impacting oil prices globally. In 2023, global crude prices thankfully moderated in the first half. But with both Saudi Arabia and Russia extending their oil production cuts until the end of the year and U.S. oil reserve figures slipping downward, prices are back on the upward trend. That could be great for investors holding oil stocks, but not all oil stocks benefit from the trend. Some companies face operational challenges and financial difficulties that could limit their upside potential.
Below are three oil stocks investors should sell before they crash and burn.
NCS Multistage Holdings (NCSM)
NCS Multistage Holdings (NASDAQ:NCSM) provides products and services for horizontal and directional drilling. The company’s main product is the Multistage Unlimited system, which enables operators to stimulate multiple zones in a single wellbore.
NCS Multistage has been struggling to generate profitable growth in recent years. In 2022, the company’s revenue experienced its largest year-over-year (YoY) increase in a number of years, but the drilling company was still unable to generate net income. Last year, oil prices hit record highs; however, in 2023, prices have largely moderated. Still, quarterly net losses only seemed to widen.
In its first-quarter earnings report, net losses increased to $15 million due to ongoing litigation against NCS for a faulty product. Similarly, the company’s financial situation worsened in the second quarter of 2023, when it reported a net loss of $32.2 million on revenues of $25.4 million, compared to a net loss of $5.5 million on revenue of $27.5 million in the same period last year. Again, increasing litigation costs were to blame.
NCS Multistage will face significant challenges in the competitive and cyclical oilfield services industry if it cannot control operating costs and atypical expenses like legal action. These could severely hurt the company’s earnings in the future, convincing investors to look elsewhere for yield. Current investors should sell before operating costs continue to balloon.
Drilling Tools International (DTI)
Drilling Tools International (NASDAQ:DTI) is another company exposed to drilling operations related to the oil and gas industry. The company manufactures downhole drilling tools for horizontal and directional drilling. The company’s product portfolio includes drill collars, stabilizers, reamers, hole openers, subs, jars, shock tools and motors.
The drilling company went public via a SPAC merger in June 2023, but shares have fallen 36% since then. The reason is not only due to a lackluster SPAC IPO market but also because investors doubt the company’s ability to grow sustainably in the near and medium term. In its second-quarter earnings report, Drilling Tools’ revenue increased by 25% year-over-year, but its net income declined by $5 million over the same period. That was primarily due to higher operating costs.
The company’s balance sheet is another cause for worry. The capital-intensive company only reported $7.2 million in cash on its balance sheet. These types of businesses require healthy cash flow and cash balances in order to follow through with large projects efficiently. While Drilling Tools International has access to a $60 million revolving line of credit, it’s difficult to say how the company can use enough capital without falling victim to high-interest payments. The revolver is, after all, floating interest.
With shares dipping as low as they are and future profitability in question, investors should steer clear.
ProFrac Holding (ACDC)
ProFrac Holding (NASDAQ:ACDC) provides hydraulic fracturing and other well-completion services for oil and gas producers. The company operates from various locations across North America, offering pressure pumping, wireline logging, perforating, coiled tubing, cementing, acidizing, nitrogen pumping, sand mining, proppant transportation and storage, water management and disposal services.
ProFrac Holding has been pursuing an aggressive acquisition strategy in recent years, buying several companies in the oilfield services sector, such as U.S. Well Services and FTS International. The company’s revenue increased by 216% in 2022, mainly due to higher demand and pricing in its core products coupled with the contribution of the acquired businesses.
However, ACDC’s profitability has been declining as a result of the integration costs, asset impairments and goodwill write-offs associated with the acquisitions. The company reported a net loss of $4.6 million in its second-quarter report, much lower than the $67.4 million net income figures from the same period last year.
While ProFrac generated $709 million for Q2, ballooning operating costs seem to have taken their toll on overall profitability. Along with acquisition-related costs, the company has $1.2 billion in debt on its balance sheet while only sporting $26.9 million in cash. The oversized debt burden has resulted in recurring high-interest payments, which have also dragged on net margins.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
