Energy is a highly cyclical industry, meaning efficient portfolio management dictates frequent sector rebalancing within an alpha-seeking investor’s asset mix. Although energy companies have delivered stellar results in recent years, global supply and demand factors are smoothing out. Moreover, consumer sentiment is waning, which introduces demand-side risk.
Despite the United States Brent Oil Fund (NYSEARCA:BNO) holding up well with a 6-month gain of more than 11%, the United States Natural Gas Fund (NYSEARCA:UNG) has slipped by more than 20% in the same period. Natural gas prices often act as a leading indicator of oil, meaning we are likely to see a dip in oil prices real soon. In addition, coal prices are down by nearly half since the start of the year and a lack of catalysts exist to suggest that a turnaround is en route.
Many might dispute my outlook, which is fair enough as the financial marketplace maintains its functionality due to opposing views. However, if you agree with my vantage point, here are three energy stocks to sell.
Chevron (CVX)
Chevron (NYSE:CVX) has numerous factors that may influence its stock price. The company’s substantial presence within the energy sector means systematic variables such as oil and gas prices are salient. As mentioned before, oil and gas prices face numerous headwinds that may relay into CVX stock’s near-term performance.
Furthermore, Chevron is in the midst of an acquisition. The company has agreed to acquire fellow energy explorer Hess (NYSE:HES) for $53 billion. Even though Hess could add long-term value, the pending acquisition faces two implications. Firstly, CVX stock may suffer from merger arbitrage, a financial theory stating that acquirers usually shed interim value during acquisitions due to the embedded premium within transactions. Moreover, the Hess deal has drawn the attention of the Federal Trade Committee. Potential litigation paired with deal uncertainty is a recipe for poor stock performance.
Chevron delivered its third-quarter earnings report in October, revealing an earnings-per-share figure of $3.05, falling short of its $3.70 estimate. I believe the firm’s latest report is a sign of the times. Although CVX stock’s price-to-earnings ratio of 10.48x and a forward dividend yield of 4.18% aren’t badly placed, I think we are looking at a strong sell here.
TotalEnergies (TTE)
Jefferies (NYSE:JEF) recently downgraded TTE (NYSE:TTE) stock to Hold based on the notion that the natural gas industry is normalizing.
I share the same view as Jefferies. TotalEnergies’ net profit margin of 8.59% is razor thin, especially considering the intensity embedded in the oil and gas pricing landscape. The only way around lower implied prices would be to increase production by a substantial amount, which would likely require leverage that will erode shareholder value.
TotalEnergies released its third-quarter earnings report in October, revealing a few stumbling blocks. Although maintenance played a part, Total’s third-quarter production slipped by 7.66% year-over-year, while its refinery throughput declined by 7%. Moreover, Total’s net profit declined by 35% year-over-year to settle at $6.45 billion. One could argue the company’s production will increase next year due to completed maintenance. However, I am betting on weaker-than-expected demand and a sluggish price environment.
TotalEnergies has a price-to-book ratio of 1.65x, which isn’t bad. However, year-end impairments are likely, given the weak pricing environment and high-interest rates. A forward dividend yield of 4.87% could salvage some value in the event of a TTE stock drawdown. Yet, I think capital losses will dominate proceedings.
Alpha Metallurgical Resources (AMR)
Alpha Metallurgical Resources (NYSE:AMR) stock is a high-beta play, meaning the stock is as cyclical as it gets. Therefore, I urge investors to consider this asset with caution, as its downside capture can be significant. While AMR stock can be rewarding in bull markets, it should ideally be avoided whenever coal prices look flimsy.
The U.S. coal miner released its third-quarter earnings report in November. Although Alpha Metallurgical beat its earnings target by 19 cents per share, the firm’s revenue slumped by 14.7% year-on-year to miss its target by $3.4 million.
Alpha Metallurgical’s 2024 guidance is higher than its 2023 expectations because the company expects metallurgical shipment volumes to reach 15.5 million and 16.5 million metallurgical tons. However, price pressures will likely phase out any benefits derived from higher shipments. Coal acted as a valuable stopgap in the 2021/22 energy shortage, but a combination of cyclical and political headwinds will probably dent the commodity’s prospects.
An argument exists that AMR stock is undervalued. I mean, AMR’s price-to-earnings ratio of 5.91x echoes value. However, a value trap is likely embedded here as cyclicality is of the essence. In fact, AMR stock is trading above its 10-, 50-, 100-, and 200-day moving averages, implying that mean reversion is a lingering probability.
On the date of publication, Steve Booyens 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.
