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 influence capital spending (like interest rates and commodity prices), and the industry has underperformed the market over the past six months as its 1.7% return lagged the S&P 500 by 11.1 percentage points.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Keeping that in mind, here are three energy stocks we’re passing on.
Murphy Oil (MUR)
Market Cap: $5.55 billion
Operating in waters over a mile deep in the Gulf of Mexico and extracting hydrocarbons from tight shale rock formations in Texas, Murphy Oil (NYSE:MUR) explores for and produces crude oil, natural gas, and natural gas liquids from fields in North America and Asia.
Why Are We Wary of MUR?
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 5.1 percentage points
At $38.44 per share, Murphy Oil trades at 11.9x forward P/E. If you’re considering MUR for your portfolio, see our FREE research report to learn more.
Patterson-UTI (PTEN)
Market Cap: $4.31 billion
Operating 135 Tier-1 super-spec rigs that can handle the industry's most demanding drilling projects, Patterson-UTI (NASDAQ:PTEN) provides contract drilling rigs, hydraulic fracturing, and drill bits to oil and gas operators.
Why Does PTEN Give Us Pause?
- Costly operations and weak unit economics result in an inferior gross margin of 29.9% that must be offset through higher production volumes
- Static EBITDA margin over the last five years shows it couldn’t become more efficient
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.8% for the last five years
Patterson-UTI is trading at $11.41 per share, or 66.3x forward P/E. Dive into our free research report to see why there are better opportunities than PTEN.
NESR (NESR)
Market Cap: $2.30 billion
Operating across 16 countries from Algeria to Indonesia, NESR (NASDAQ:NESR) provides oilfield services like hydraulic fracturing, cementing, and drilling to oil and gas companies.
Why Are We Wary of NESR?
- Smaller revenue base of $1.62 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Gross margin of 12.8% is below its competitors, leaving less money to invest in exploration and production
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 74.1 percentage points
NESR’s stock price of $22.98 implies a valuation ratio of 11.1x forward P/E. To fully understand why you should be careful with NESR, check out our full research report (it’s free).
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