Crude oil prices have been on fire this year with OPEC’s production cuts and the anticipation of interest rate pullbacks. Amidst the bullishness, though, it’s important to be circumspect, which should have investors considering energy stocks to sell in April.
Building a balanced and diversified portfolio is imperative in capitalizing on the market’s current momentum. Also, with rate cuts imminent, it is imperative to take advantage of a market environment that is ripe with both opportunities and challenges. Moreover, with the global economy expected to strengthen and crude oil prices likely to climb further, it’s best to offload these lackluster energy stocks to sell.
Chesapeake Energy (CHK)
Chesapeake Energy (NASDAQ:CHK) made headlines last year with its massive $7.2 billion acquisition of Southwestern Energy. The merger has effectively created one of the largest natural gas-focused businesses in the North American region.
Though CHK has become a much larger entity in its niche, paying such a steep price for a business operating in the lackluster natural gas space is surprising. Natural gas prices tanked more than 60% last year, and prospects for 2024 aren’t too bright either. Though Henry Hub spot prices are expected to average higher this year, they will likely remain lower than $3 per million British thermal units (MMBtu).
The crippling effects of plummeting natural gas prices on CHK are apparent in its recent quarterlies. In the past four consecutive quarters, it posted a double-digit decline in sales growth, handily missing analyst estimates. Add in the $7.2 billion acquisition of Southwestern in such challenging conditions, and you have investors scratching their heads.
TC Energy (TRP)
Canadian oil and gas player TC Energy (NYSE:TRP) may seem like an enticing proposition on paper, yielding an attractive 7%. However, there’s plenty of evidence to suggest it is more of a dividend trap than anything.
For starters, it consistently bleeds free cash flow (FCF), a figure that’s been firmly in the negative over the past decade. Additionally, that trend will continue to persist, considering how it finances its dividends through debt issuances. To illustrate my point, it attracts a concerning 3 on 10 financial strength rating from GuruFocus, with multiple liquidity metrics in the red.
Furthermore, the company’s debt is locked in at peak rates, weighing down its business with rising debt servicing costs. This financial pressure could potentially result in asset sales, hinting at possible desperation, which risks value erosion. Overall, TC Energy’s financial positioning raises significant concerns, making it an unattractive bet for investors seeking sustainable value.
Transocean (RIG)
Transocean stock (NYSE:RIG) has taken a 20% hit in the past six months. The world’s largest offshore drilling contractor faces multiple headwinds, with earnings estimates missing in four out of the past five consecutive quarters. It’s grappling with contract startup delays, rising operational costs, and a negative FCF, which has recently weighed down its financials.
Its Q4 results showed a healthy increase in YOY sales but operational costs in tandem, resulting in a trailing twelve-month (TTM) operating income of negative $64 million. Additionally, its TTM FCF per share stands at a negative 34 cents, 158% lower than its 2020 showing at 22 cents. Furthermore, with a debt load of $7 billion, its path to reducing its debt and improving its financial health remains daunting. Though its efforts to extend contract durations and secure higher day rates are commendable, the rising costs and lack of cash flow generation underscore the challenges ahead.
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.
