Beware! 3 Oil Stocks Waving Massive Red Flags Right Now

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  • Amid oil’s upheaval, consider pivoting away from these three oil stocks to sell.
  • San Juan Basin Royalty Trust (SJT): Amid a 41% stock dip YTD, SJT’s whopping 25% dividend yield seems enticing, but a mere 20% 5-year growth rate flags a potential dividend trap.
  • BP Prudhoe Bay Royalty Trust (BPT): BPT’s unique design dangles a termination clause threatening dissolution, which seems likely following two quarters top-line growth struggles.
  • Icahn Enterprises (IEP): IEP’s sudden dividend cut and a shocking second-quarter report showing a 72-cent loss per share cast doubt.
oil stocks to sell - Beware! 3 Oil Stocks Waving Massive Red Flags Right Now

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In the world of investments, the oil sector continues to oscillate between boom and bust, testing investors’ mettle globally. Following the Russian incursion into Ukraine last year, the world was reminded of Russia’s role as a cornerstone in Europe’s oil supply chain, giving rise to supply fears and speculative investor bids on crude oil. This, married with the crippling effects of inflation, propelled U.S. gasoline prices to an agonizing peak of $5 a gallon last June, but the pendulum swings yet again. As we venture deeper into 2023, signs of more correction emerge, spotlighting the oil stocks to sell for investors.

Chinese exports are escalating, and Russia finds willing buyers even in a shaky global economy, painting a landscape of change. Consequently, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) is up 5.2% year-to-date, lagging the S&P 500, which posted a gain of 16% over the same period.

So here are the oil stocks to sell in September.

San Juan Basin Royalty Trust (SJT)

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The San Juan Basin Royalty Trust (NYSE:SJT) continues to exhibit signs of instability in the energy sphere. Despite recording a rise in distributable income in 2022, primarily due to elevated oil and gas prices, a sharp pull-back this year has raised concerns over its shareholder rewards.

It plans to allocate a significant $4.4 million for capital expenditures, which is likely to weigh down distributions while hurting its stock price. Consequently, SJT stock is down 41% year-to-date.

Furthermore, SJT’s monthly dividends have dropped by double-digit margins in three of the past four months. Moreover, with a dividend yield of over 25%, its 5-year dividend growth rate stands at just 20%, which is indicative of its being a dividend trap. Moreover, the high-income volatility over the past decade surpasses most of its peers, hinting at potential financial unpredictability for investors. This makes it one of those oil stocks to sell.

BP Prudhoe Bay Royalty Trust (BPT)

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BP Prudhoe Bay Royalty Trust (NYSE:BPT) stands out in the intricate tapestry of U.S. oil trusts, intriguing many with its unique operational design. With no net sales during the year’s first half and a bleak outlook for the third quarter, its termination clause looms large, a concerning detail for prospective investors. This clause, an ax ready to fall if revenues nosedive under $1 million per year for two consecutive years, threatens to dissolve the company entirely, leaving stakeholders high and dry.

The Trust’s track record is far from comforting; a staggering 50% downturn in the past year and a 40% negative year-to-date return amplify the uncertainty.

Even a broader view paints a grim picture, revealing a 90% drop over the last decade. While some might be tempted by the siren call of potential high rewards should oil prices rally, the inherent risks and volatility suggest a cautionary approach.

Icahn Enterprises (IEP)

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Investors nursing high hopes with Icahn Enterprises (NYSE:IEP) were dealt a jarring blow when it slashed its once-generous dividend from $2 to $1 a share. This dramatic pivot pulled down its once staggering dividend yield of over 25%, setting it atop the echelons of the energy sector. Behind the scenes, the sudden drop may have been due to a scathing May report from short-seller Hindenburg Research. This damning exposé painted a remarkably murky picture, alleging Carl Icahn of operating a veiled Ponzi Scheme, channeling fresh investor funds into sustaining what Hindenburg labeled as “unsustainable” dividends.

The company resisted lowering its dividend payout, dismissing Hindenburg’s claims as nothing more than a smear campaign against his empire. However, the aftermath of a disheartening second-quarter earnings report, pointing to a crippling loss of 72 cents a share against anticipated 25-cent profit projections, is likely to have nudged the dividend decision, casting shadows of uncertainty over Icahn Enterprises’ future.

On the date of publication, Muslim Farooque did not have (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


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