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 their prominence also brings high exposure to the ups and downs of economic and energy cycles. Luckily, the tide is turning in their favor as the industry’s 39.2% return over the past six months has topped the S&P 500 by 29.2 percentage points.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Keeping that in mind, here are two energy stocks we think can generate sustainable market-beating returns and one we’re steering clear of.
One Energy Stock to Sell:
Atlas Energy Solutions (AESI)
Market Cap: $2.28 billion
Building the world's first long-haul proppant conveyor system to reduce truck traffic, Atlas Energy Solutions (NYSE: AESI) mines and processes sand used as proppant to prop open fractures in oil and gas wells during hydraulic fracturing.
Why Do We Pass on AESI?
- Revenue base of $1.06 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 29.6 percentage points
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Atlas Energy Solutions’s stock price of $18.50 implies a valuation ratio of 12.2x forward EV-to-EBITDA. To fully understand why you should be careful with AESI, check out our full research report (it’s free).
Two Energy Stocks to Watch:
CNX Resources (CNX)
Market Cap: $5.06 billion
Tracing back to operations that began in 1860, CNX Resources (NYSE: CNX) drills for and produces natural gas from underground shale formations in Pennsylvania, Ohio, and West Virginia.
Why Could CNX Be a Winner?
- Highly-profitable operating model results in strong unit economics and a premier gross margin of 68%
- EBITDA profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
CNX Resources is trading at $35.80 per share, or 12.4x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Vitesse Energy (VTS)
Market Cap: $758.3 million
Taking a hands-off approach to energy production, Vitesse Energy (NYSE: VTS) owns non-operated stakes in oil and natural gas wells primarily in North Dakota and Montana's Williston Basin.
Why Do We Watch VTS?
- Highly-profitable operating model results in strong unit economics and a best-in-class gross margin of 80%
- Robust free cash flow margin of 24.4% gives it many options for capital deployment
At $18.18 per share, Vitesse Energy trades at 36.8x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
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