It may be time to sell some of the top energy stocks, especially as they become overvalued. Sure, according to the International Energy Agency, rising post-Covid demand from China, coupled with tight supply, suggests that a crude oil rebound is possible later this year. However, U.S.-driven factors such as debt ceiling uncertainty and continued interest rate hikes from the Federal Reserve may outweigh this, possibly pushing Light Sweet Crude prices (now in the low-$70s per barrel) to even lower prices. Having said that, it’s not as if all energy stocks are in for a big drop, if oil prices tumble again.
Conversely, it’s not as if all names in this space have big room to run, if oil has yet another rebound. With these seven energy stocks to sell now, risk/return is not in your favor. Each one is relatively overvalued, with company-specific issues that further bolster their respective bear cases.
|World Fuel Services
On the surface, it may sound odd to consider ConocoPhillips (NYSE:COP) an overvalued stock. Shares in this oil and gas giant trade for 8.2 times trailing twelve-month earnings. However, keep in mind that energy prices are lower than they were for most of 2022. With this, it’s likely better to use forward valuation when it comes to determining whether COP stock is overvalued or undervalued. Based on sell-side forecasts, COP trades for 10.4 times forward earnings. Yes, compared to most stocks, this sounds like a low valuation.
But when you compare ConocoPhillips to peers, this valuation may make COP one of the overvalued energy stocks. Alongside this, as Mizuho’s Nitin Kumar argued back in April, it may prove difficult for the company to live up to its 10-year outlook. The analyst even added there are more attractive opportunities out there among large energy stocks.
Yet with the “Oracle of Omaha” paring down Berkshire’s CVX stock position by 20% last quarter, the integrated oil and gas giant’s shares may be losing this Buffett seal of approval. The answer to this question is somewhat unclear. The legendary investor hasn’t made any public statements signaling why Berkshire is reducing its stake. Then again, as a Seeking Alpha commentator recently argued, it makes sense why Buffett is making an exit. Mainly, because CVX’s cash flow generation does not justify its current valuation (8.3 times TTM earnings). On purely valuation grounds, you may want to consider Chevron as one of the energy stocks to sell now.
While it’s possible I’m splitting hairs about the valuations of COP and CVX, it’s clear that oil and gas exploration and production company Hess (NYSE:HES) sports a rich multiple for an energy stock. HES stock currently trades for nearly 20 times TTM earnings. Based on 2023 earnings forecasts, Hess appears even more pricey, with a forward multiple of 28.7. Yes, there is a reason why HES has become one of the more overvalued energy stocks. As InvestorPlace’s Faisal Humayun pointed out in April, there is big potential with the company’s Guyana exploration projects.
In the coming years, the development of these assets could result in massive profitability growth. Even so, with this potential upside largely priced in, shares may have little room to run from here. Likewise, if crude oil prices fall again, revisions to future earnings forecasts may push HES to much lower prices.
World Fuel Services (INT)
Based in Miami, Florida, World Fuel Services (NYSE:INT) is a marketer/wholesaler of aviation, marine, and ground transportation fuel. Analysts expect INT’s earnings to grow at a steady clip between this year and 2025. Two years from now, the company could earn $3.01 per share. Not too shabby, given the current INT stock price ($23.50 per share). Then again, maybe not. There is likely a high level of uncertainty behind future earnings forecasts for World Fuel Services.
The company has a history of growth via acquisitions. Increasing earnings by 65% from 2022 may hinge too heavily on more successful dealmaking. The post-Covid boom times for aviation could also come to an end if the economic slowdown worsens. This too could weigh on INT’s future results.
Occidental Petroleum (OXY)
Warren Buffett may be bailing on Chevron, but it’s a different story with Occidental Petroleum (NYSE:OXY). Berkshire continues to buy more shares in the E&P company. Buffett’s firm now owns nearly 25% of it.
However, at just under $60 per share, it’s questionable whether OXY stock is a bargain. Shares now trade at the higher end, valuation-wise, among E&P stocks, with forward earnings multiple of 12. Occidental Petroleum’s latest quarterly results also fell short of expectations.
The “Buffett factor” may be helping to keep OXY elevated, but it’s questionable how much longer this can continue. As InvestorPlace’s Joel Baglole argued earlier this month, as Buffett is not interested in buying the company outright, outside of an unforeseen spike in crude oil prices back to 2022 highs, it’s easy to see the energy stocks bubble that has emerged with OXY deflating from here.
Transocean (NYSE:RIG) traded below $1 per share during 2020, as the pandemic-driven collapse in oil prices dried up demand for the contract drilling firm’s services. Since oil’s epic comeback in 2021, however, RIG stock has rallied by more than six-fold. Yet while the oil and gas landscape has improved tremendously, it’s not as if this company has already pulled off a big recovery, in terms of its operating performance.
Transocean reported net losses last year and is expected to remain in the red for 2023. Even as analyst forecasts call for the company to report positive earnings in 2024 and 2025, an additional drop in energy prices may mean results fall short of current expectations. All of this points to RIG being one of the energy stocks to avoid. Any bit of disappointment could send it sinking back to penny stock territory (under $5 per share).
Unlike Transocean, Schlumberger (NYSE:SLB) is an oil services company that has been consistently profitable recently. Yet while this stock may have less uncertainty than turnaround play RIG, it’s possible that investors have pushed SLB to too high of a valuation.
SLB stock today trades for 16.8 times TTM earnings, and 15.1 times forward earnings. Admittedly, SLB has historically traded for between 12 and 20 times earnings, during times of steady profitability. Still, shares could slip down to the lower end of this valuation range, if bullishness for the stock cools from here.
Something that could dampen enthusiasm may be the prospect of stagnant oil prices. As InvestorPlace’s Larry Ramer argued earlier this month, this could impact Schlumberger’s growth prospects. In turn, resulting in a de-rating for shares. Although downside risk may not be very high, consider SLB one of the energy stocks to sell now.
On the date of publication, Thomas Niel 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.