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.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 6.7% return lagged the S&P 500 by 4.9 percentage points.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. With that said, here are three energy stocks that may face trouble.
Transocean (RIG)
Market Cap: $6.41 billion
Operating one of the world's most capable fleets of ultra-deepwater drillships and harsh environment rigs, Transocean (NYSE: RIG) operates drilling rigs that energy companies rent to drill oil and gas wells in deep ocean waters.
Why Do We Think RIG Will Underperform?
- Sales tumbled by 3.2% annually over the last ten years, showing market trends are working against it during this cycle
- Costly operations and weak unit economics result in an inferior gross margin of 37.9% that must be offset through higher production volumes
- Low free cash flow margin of 5.2% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $5.71 per share, Transocean trades at 31.1x forward P/E. Dive into our free research report to see why there are better opportunities than RIG.
Expro (XPRO)
Market Cap: $2.03 billion
Operating in over 50 countries from deepwater offshore platforms to remote onshore fields, Expro (NYSE: XPRO) provides equipment and services that help oil and gas companies drill wells, measure production, and maintain well integrity.
Why Are We Hesitant About XPRO?
- Subscale operations are evident in its revenue base of $1.55 billion, meaning it has fewer distribution channels than its larger rivals
- High extraction costs and unfavorable asset economics are reflected in its low gross margin of 20.2%
- Poor free cash flow margin of 2.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Expro’s stock price of $18.10 implies a valuation ratio of 14.1x forward P/E. To fully understand why you should be careful with XPRO, check out our full research report (it’s free).
HighPeak Energy (HPK)
Market Cap: $1.01 billion
Operating in the oil-rich northeastern corner of the Midland Basin where Howard and Borden counties meet, HighPeak Energy (NASDAQ: HPK) explores for, develops, and produces crude oil, natural gas liquids, and natural gas.
Why Is HPK Not Exciting?
- Subscale operations are evident in its revenue base of $893.8 million, meaning it has fewer distribution channels than its larger rivals
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 18.5 percentage points
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
HighPeak Energy is trading at $7.97 per share, or 3.9x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including HPK in your portfolio.
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