The oil market has been on a roller coaster ride in the past few years, with prices fluctuating wildly due to various factors such as pent-up travel demand post-COVID and geopolitical tensions between Western nations and Russia. While crude oil prices are expected to rebound in the second half of 2023, thanks to OPEC+ production cuts and falling oil inventories, not every oil and gas company will be positioned to benefit from this trend and provide shareholders with the best returns.
Below, I will take a look at three oil and gas stocks that investors should dump before they potentially inflict damage on their portfolios.
Northern Oil and Gas (NOG)
Northern Oil and Gas (NYSE:NOG) is a company interested in investing in non-operated minority working interests in oil and gas properties in North Dakota and Montana. In other words, Northern Oil and Gas primarily acquires majority stakes from non-operated land and partners with exploration and production (E&P) companies oil for drilling expertise.
Though in 2021 and 2022, the company received a nice windfall of profits from higher oil prices, top-line figures began to decline in the first half of 2023. Lower oil prices, of course, played a major role in this fluctuation, but investors should be wary of Northern’s debt burden and capital expenditures. As of June 30th, 2023, Northern’s cash balance stood at only $14.8 million when the company generated $508.0 million in net income during the first half of the year. The oil company’s debt balance stood at a whopping $1.6 billion, while capital expenditures came in at $833.6 million for the first half of 2023.
While the company is not generating free cash flow, investors are perhaps better searching for the multitude of oil and gas companies that do.
Genesis Energy (GEL)
Genesis Energy (NYSE:GEL) is a master limited partnership that provides midstream services to the oil and gas industry, such as pipeline transportation, storage, refining, and marketing. Like many oil and gas companies, Genesis delivered outstanding financial performance in 2021 and 2022. Unfortunately, despite robust top-line growth, the midstream services company has generated less-than-stellar margins. For example, in 2022, Genesis took home $75.5 million in net income after pulling in $2.8 billion in total revenue, representing an overall net margin of around 2.7%.
To figure out why Genesis’s margins are so low, look no further than to its high operating costs and interest expenses. High operating costs for a midstream services company are typical, but having $3.5 billion in debt with only $11.5 million of cash on the balance sheet is a red flag, especially for a company that desires to maintain a 6% dividend yield. Investors should not expect that juicy dividend to last if the company fails to expand margins in the following quarters.
Halliburton Company (HAL)
Halliburton Company (NYSE:HAL) is one of the world’s largest providers of oilfield services. The company offers various products and services to help oil and gas companies drill, complete, produce, and optimize their wells. Revenues and gross margins have definitely picked up in recent years. In 2022, revenue growth jumped to 32.7% Y/Y while EBITDA margins improved by 597 basis points to 17.3%.
Even though Halliburton continued to beat Wall Street’s estimates in the first half of 2023, the company’s management team expects revenues to decline in the second half of the year due to reduced demand for drilling.
As oil prices edge up to $100 a barrel, shale oil executives in the United States have already promised to hold back drilling in order to “maintain capital discipline.” If there is less drilling worldwide due to production cuts from OPEC+ and less demand for drilling in the United States, Halliburton could see revenue decline in the second half, thus jeopardizing its share price. Given the mixed outlook, investors should sell their shares before things worsen.
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.
