Energy businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But they are at the whim of volatile macroeconomic factors that sway capital spending, like interest rates and commodity prices. Wariness surrounding these influences has caused the industry to underperform the market as it was flat over the past six months while the S&P 500 climbed by 8.2%.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three energy stocks we’re steering clear of.
SLB (SLB)
Market cap: $79.34 billion
What began in 1926 with two brothers logging the first electrical measurements in a well, SLB (NYSE: SLB) provides technology and services to help oil and gas companies locate reservoirs, drill wells, and produce hydrocarbons.
Why Are We Hesitant About SLB?
- Costly operations and weak unit economics result in an inferior gross margin of 21.2% that must be offset through higher production volumes
- EBITDA margin failed to increase over the last five years, indicating the company couldn’t optimize its expenses
SLB’s stock price of $54.12 implies a valuation ratio of 18.6x forward P/E. If you’re considering SLB for your portfolio, see our FREE research report to learn more.
Oceaneering (OII)
Market cap: $4.14 billion
Deploying a fleet of 250 tethered underwater robots around the globe, Oceaneering International (NYSE: OII) provides remotely operated underwater vehicles and subsea equipment for offshore energy exploration.
Why Do We Avoid OII?
- Sales trends were unexciting over the last five years as its 9.8% annual growth was below the typical energy upstream and integrated energy company
- Gross margin of 18.1% is below its competitors, leaving less money to invest in exploration and production
- Low free cash flow margin of 5.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $41.94 per share, Oceaneering trades at 17.9x forward P/E. Check out our free in-depth research report to learn more about why OII doesn’t pass our bar.
ProPetro (PUMP)
Market cap: $953.4 million
Operating exclusively in the Permian Basin—one of America's most prolific oil-producing regions—ProPetro (NYSE: PUMP) provides hydraulic fracturing services that pump high-pressure fluid and sand into oil wells to release trapped hydrocarbons.
Why Should You Sell PUMP?
- Annual revenue growth of 9.3% over the last five years was below our standards for the energy upstream and integrated energy sector
- Costly operations and weak unit economics result in an inferior gross margin of 27.2% that must be offset through higher production volumes
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 7.2 percentage points
ProPetro is trading at $7.70 per share, or 29.2x forward P/E. If you’re considering PUMP for your portfolio, see our FREE research report to learn more.
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