Whether you see them or not, energy businesses play a crucial part in our daily activities, from powering our homes and businesses to powering our transportation and industries.Their momentum is also rising as lower interest rates, as well as AI energy needs, have incentivized higher capital spending. As a result, the industry has posted a 34.2% gain over the past six months, beating the S&P 500 by 26.5 percentage points.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. With that said, here are three energy stocks we’re passing on.
Northern Oil and Gas (NOG)
Market Cap: $2.52 billion
Taking the path less traveled in the oil industry by choosing not to operate its own wells, Northern Oil and Gas (NYSE: NOG) acquires minority stakes in oil and gas wells operated by other companies across major U.S. shale basins.
Why Does NOG Worry Us?
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 3.2 percentage points
Northern Oil and Gas is trading at $24.07 per share, or 6.6x forward P/E. If you’re considering NOG for your portfolio, see our FREE research report to learn more.
Liberty Energy (LBRT)
Market Cap: $5.17 billion
Operating approximately 40 active fleets across North America's most productive shale basins, Liberty Energy (NYSE: LBRT) provides hydraulic fracturing services that help oil and gas companies extract resources from shale formations.
Why Is LBRT Not Exciting?
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 23.3%
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.3% for the last five years
Liberty Energy’s stock price of $32.03 implies a valuation ratio of 103x forward P/E. Read our free research report to see why you should think twice about including LBRT in your portfolio.
World Kinect (WKC)
Market Cap: $1.38 billion
Serving over 150,000 customers from commercial jets to cargo ships to heating oil consumers, World Kinect (NYSE: WKC) procures and delivers fuel and energy products to airlines, shipping companies, trucking fleets, and industrial businesses worldwide.
Why Are We Out on WKC?
- Costly operations and weak unit economics result in an inferior gross margin of 2.3% that must be offset through higher production volumes
- Low free cash flow margin of 0.3% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $27.04 per share, World Kinect trades at 0x forward price-to-sales. To fully understand why you should be careful with WKC, check out our full research report (it’s free).
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