Is the market likely to see a reset, similar to the ones after the dot-com bubble in 2000 and the 2008 financial crisis? As with everything in economics, opinions are divided. In this uncertain environment, identifying energy stocks to avoid becomes a critical strategy for investors looking to safeguard their portfolios.
What is known is that the New York Fed’s recession probability indicator is still highly elevated at 58.3%, 12 months ahead. Moreover, the USG agencies are plagued with economic data revisions. At the end of 2023, Fed Governor Christopher Waller noted that “the problem with data is it gets revised.”
It’s the same data, ranging from employment and payroll to GDP growth and inflation, that the central bank uses to determine monetary policies. And these policies can make the macroeconomic landscape worse or better.
With so much noise, investors are on a back foot. In turn, they resort to defensive assets, as evidenced by the SPDR Gold Trust (NYSEARCA:GLD) returning 16% over the last 6 months. During recessions, energy stocks, in particular, get crushed because the overall economic activity is significantly reduced.
In March, Citigroup (NYSE:C) analysts forecasted $55/bbl for Brent crude oil by late 2025 from the present $87 a barrel. That would greatly impact both oil and natural gas equities.
With this eventuality in mind, which holdings are energy stocks to avoid ahead of their potential crash?
Halliburton (HAL)
Halliburton (NYSE:HAL), facilitating oil exploration and drilling services for companies like Saudi Aramco and ExxonMobil (NYSE:XOM), is highly susceptible to both geopolitical tensions and recession. That positions it as a key candidate among energy stocks to avoid, especially considering potential market instability.
Year-to-date (YTD), HAL stock has been flat. Presently priced at $36.33, HAL shares are 30% above the 52-week low point of $27.84 per share. As of December 2023, the company operated in over 70 countries with 47.8k employees, of which 16k is located in the Middle East/Asia region.
For the fiscal year of 2023, Halliburton reported $23 billion in revenue vs $20.3 billion in 2022. Free cash flow was exceptionally strong in 2023, at $2.27 billion vs $1.4 billion in 2022, followed by net income at $2.6 billion vs $1.57 billion the year prior. In the form of dividends, Halliburton returned its shareholders $1.4 billion.
In other words, this is a strong position to leave HAL stock exposure, with the aforementioned scenario in mind.
Devon Energy (DVN)
Also in the capital-intensive sector of exploration and production of oil and natural gas, Devon Energy (NASDAQ:DVN) is less strategically diversified than Halliburton. Operating primarily in the North American basins, the company is still reeling from winter storms, having shut down its refinery in Texas and cut North Dakota’s oil production in half.
Consequently, Devon’s Q4 2023 report in February projects a 2% production slump. Otherwise, the company exceeded its guidance by 1%. Devon’s Delaware Basin, accounting for 65% of oil production, offset the inclement weather, delivering $2.7 billion in free cash flow vs. $6 billion in 2022. That was the company’s highest free cash flow in its 52-year history.
Devon Energy stock started the year strong, having returned 10.4% value to shareholders YTD, making it a suitable exit point. At the present price of $50.40, DVN shares are 24.5% above the 52-week low point of $40.47 per share.
Occidental Petroleum (OXY)
Following the reporting on Warren Buffett’s substantial stake in the company, Occidental Petroleum (NASDAQ:OXY) has become somewhat of a meme stock. YTD, OXY shares gained 7% in value, at a present price of $64.45. That is nearly 17% above the 52-week low of $55.12 per share.
As with the other two companies, Occidental’s core business revolves around oil and gas exploration and production, with a subsidiary — OxyChem — for petrochemical output. For Q1 2024 earnings, Occidental is scheduled to give its report on May 8th.
In line with the oil price boost from 2022 to 2023, the company concluded the year with $3.7 billion in net income vs. $12.5 billion in 2022. That was due to higher expenses and a decline in petrochemical revenue. The massive 70% curtailment of profits, combined with retail speculation and a recession scenario, makes OXY shares a solid exit candidate at its strong point. Over one year, OXY broke even at positive 0.05% returns. That trend will likely continue.
On the date of publication, Shane Neagle 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.
