The oil market has been on a roller coaster ride in the past few years, with prices fluctuating wildly due to various factors like pent-up travel demand post-COVID and geopolitical tensions between Western nations and Russia. Brent crude prices are now sitting around $78/bbl, well below where it was in mid-September 2023, above $90/bbl. For now, crude oil prices are expected to stay on a downward trend, thanks to record U.S. production outweighing the OPEC+ production cuts. That will have varying impacts on not only oil and gas companies but renewable energy companies as well.
Below are three energy stocks to sell.
Genesis Energy (GEL)
Genesis Energy (NYSE:GEL) is a master limited partnership that provides midstream services to the oil and gas industry, such as pipeline transportation, storage, refining and marketing. Like many oil and gas companies, Genesis delivered outstanding financial performance in 2021 and 2022. Unfortunately, despite robust top-line growth, the midstream services company has generated less-than-stellar margins. For example, in 2022, Genesis took home $75.5 million in net income after pulling in $2.8 billion in total revenue, representing an overall net margin of around 2.7%.
What I spotted as red flags with this company months ago is still largely the case. Genesis Energy’s Q3 2023 earnings released in early November once again highlighted the company’s low FCF generation and high debt. The midstream oil services company’s cash available to shareholders stood at $89 million or 11% of revenue quarterly revenue.
With only $40 million of cash on the balance sheet, it is difficult to see how Genesis will be able to maintain its 5% dividend yield. Investors should not expect that juicy dividend to last if the company fails to expand margins in the upcoming quarters.
Northern Energy and Gas (NOG)
Northern Oil and Gas (NYSE:NOG) is a company interested in investing in non-operated minority working interests in oil and gas properties in North Dakota and Montana. In other words, Northern Oil and Gas primarily acquires majority stakes from non-operated land and partners with exploration and production (E&P) companies oil for drilling expertise.
Though in 2021 and 2022, the company received a nice windfall of profits from higher oil prices, top-line figures began to decline throughout 2023. Lower oil prices, of course, played a major role in this fluctuation, but investors should also be wary of Northern’s debt burden and capital expenditures. As of its Q3 earnings report, Northern’s cash balance stood at just under $13 million, and the company only generated $534 million in net income during the first three quarters of the year. With U.S. crude oil flooding the global market, energy prices will likely remain dampened unless geopolitical flares continue unabated in the Middle East.
That is all to say, it’s difficult to see how NOG’s revenue growth will expand in the long run. Thus, investors would perhaps be better off searching for the multitude of oil and gas companies better at generating free cash flow and maintaining a sound balance sheet.
Altus Power (AMPS)
Altus Power (NYSE:AMPS) is a commercial-scale provider of photovoltaic energy generation systems. Despite being in the renewable energy space and experiencing year-over-year (Y/Y) revenue growth, the company has been facing declining earnings and profitability margins. In its third-quarter earnings print, Altus generated $45 million in revenue, which represented a 48.1% increase on the same period last year. However, net income only came in just above $5 million, representing a net margin of 12%.
What should worry investors is Altus Power’s high depreciation costs related to the enlargement of the company’s solar energy facilities. On the surface, this probably does not come off as negative, but higher depreciation gives us a reason to rethink Altus Power’s free cash flow generation. Most companies like to add back depreciation expenses to profitability metrics like adjusted EBITDA, but for companies where depreciation expenditures are a part of the business model, this probably makes less sense. EBIT (or earnings before interest and tax) is probably a better indication of FCF for these kinds of companies.
Investors should be demanding more profitability from a company that trades at an obscene trading multiple of 53.7x forward EBIT. That is why the company makes my sell list.
On the date of publication, Tyrik Torres 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.