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. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of energy prices and the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 3.7%. This drop is a far cry from the S&P 500’s 21.4% ascent.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. On that note, here are three energy stocks we’re steering clear of.
Comstock Resources (CRK)
Market Cap: $3.85 billion
Operating in the Haynesville shale where a single well can produce millions of cubic feet of gas daily, Comstock Resources (NYSE: CRK) drills for and produces natural gas from underground shale rock formations in Louisiana and Texas.
Why Are We Bearish on CRK?
- 3.7% annual revenue growth over the last five years was slower than its energy upstream and integrated energy peers
- Day-to-day expenses have swelled relative to revenue over the last five years as its EBITDA margin fell by 9.1 percentage points
- Cash-burning history makes us doubt the long-term viability of its business model
Comstock Resources’s stock price of $13.14 implies a valuation ratio of 27.5x forward P/E. If you’re considering CRK for your portfolio, see our FREE research report to learn more.
Excelerate Energy (EE)
Market Cap: $1.04 billion
Operating specialized vessels that can deliver up to 1.2 billion cubic feet of natural gas per day, Excelerate Energy (NYSE: EE) provides liquified natural gas regasification services using floating vessels that convert LNG back into natural gas.
Why Does EE Fall Short?
- Smaller revenue base of $1.47 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Costly operations and weak unit economics result in an inferior gross margin of 29.9% that must be offset through higher production volumes
- Low free cash flow margin of 5.5% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Excelerate Energy is trading at $33.11 per share, or 17.2x forward P/E. Read our free research report to see why you should think twice about including EE in your portfolio.
Granite Ridge Resources (GRNT)
Market Cap: $585.6 million
Operating without drilling rigs or field crews of its own, Granite Ridge Resources (NYSE: GRNT) owns interests in oil and natural gas wells across six major US shale basins.
Why Is GRNT Not Exciting?
- Revenue base of $495.7 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 20.1 percentage points
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.6% for the last five years
At $4.46 per share, Granite Ridge Resources trades at 7.6x forward P/E. If you’re considering GRNT for your portfolio, see our FREE research report to learn more.
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