There are some energy stocks investors may want to take a careful look at selling or trimming in May of this year. Many of these companies enjoyed tremendous profits and soaring stock prices over the past couple of years, buoyed by high oil and natural gas prices stemming from supply chain disruptions and geopolitical tensions.
However, analysts warn that storm clouds may be gathering for the energy sector heading into the latter part of the decade. Concerns about potentially slowing global economic growth are rising, which could dampen demand for oil, natural gas and other energy commodities.
What’s more troubling to me is the world’s transition away from carbon-based sources of energy and how these giants will make such a monumental pivot.
So, with that being said, here are three energy stocks to sell before the worst comes to pass.
QuantumScape (QS)
QuantumScape (NYSE:QS) focused on developing solid-state batteries for electric vehicles, is facing significant financial pressure due to high cash burn and ongoing developmental challenges.
As Investorplace noted earlier, the company’s financial position is precarious, with a recent drop in cash reserves to $142.524 million alongside increasing expenses totaling $124.64 million. A lack of concrete commercialization plans compounds that financial strain, which raises concerns about the company’s cash burn rate and ongoing ability to fund operations.
Furthermore, a detailed report by Scorpion Capital has intensified skepticism around QuantumScape’s solid-state battery technology. This exhaustive analysis compares QS’ potential to high-profile failures like Theranos, suggesting its battery technology may not live up to its promises.
The company could then be too risky for investors to comfortably hold in their portfolios, which makes it one of those energy stocks to sell.
Energy Transfer LP (ET)
Energy Transfer LP (NYSE:ET), a major player in the midstream oil and gas sector, grapples with an unsustainable dividend payout ratio and a challenging debt profile. The company’s dividend payout ratio exceeds its earnings, raising concerns about the sustainability of its dividends.
ET has also been involved in multiple legal disputes over pipeline construction rights, including a notable case where a court ruling reversed Energy Transfer’s ability to block another company’s pipeline project.
At present, the stock’s payout ratio is 116%. It also has $53 billion in debt, with a net cash position of -$15.74 per share.
In general, high dividend payout ratios can sometimes indicate that a company is returning more money to shareholders than it might afford, which could be unsustainable in the long term. That seems to be the case with ET, with the rule of thumb being that a high yield means high risk.
ExxonMobil (XOM)
ExxonMobil (NYSE:XOM) faces significant challenges due to potential high oil prices leading to demand destruction. Similar to past cycles, rising oil prices could precipitate economic downturns, adversely affecting energy consumption and, consequently, companies heavily reliant on oil revenues.
Despite being a great dividend stock, it’s one of the few Dividend Aristocrats I wouldn’t add to my portfolio. As global emphasis on reducing carbon emissions increases, ExxonMobil’s traditional business model, heavily reliant on fossil fuels, faces significant transition risks.
That, to me, makes XOM one of those holdings that could need careful monitoring in a portfolio — it could be reasonably excluded, given this fact.
Furthermore, ExxonMobil has faced various legal battles that question its disclosures and practices regarding climate change. A Massachusetts court rejected ExxonMobil’s motion to dismiss a lawsuit alleging that the company misled investors about the risks of climate change to its business.
I expect that the noose will continue to tighten around XOM. So, although I think it’s a great business in terms of historical financial performance and income potential, its future is speculative for a massive company.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
