Even if they go mostly unnoticed, energy businesses are the backbone of our country, providing the energy we need to power our lives and businesses.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 12.6% return over the past six months has topped the S&P 500 by 7.7 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. On that note, here is one energy stock poised to generate sustainable market-beating returns and two that may face trouble.
Two Energy Stocks to Sell:
RPC (RES)
Market Cap: $1.18 billion
Operating primarily in the Permian Basin with 10 hydraulic fracturing fleets, RPC (NYSE: RES) provides specialized services and equipment like hydraulic fracturing, coiled tubing, and cementing to help oil and gas companies complete and maintain wells.
Why Are We Cautious About RES?
- Gross margin of 28% is below its competitors, leaving less money to invest in exploration and production
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 2.9 percentage points
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.4% for the last five years
At $5.45 per share, RPC trades at 21.6x forward P/E. Read our free research report to see why you should think twice about including RES in your portfolio.
Black Stone Minerals (BSM)
Market Cap: $3.14 billion
With roots dating to the late 1800s when railroads were expanding westward and land grants were common, Black Stone Minerals (NYSE: BSM) owns oil and natural gas mineral rights across the U.S., earning royalties when energy companies drill on its land.
Why Is BSM Not Exciting?
- Modest revenue base of $470 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Expenses have increased as a percentage of revenue over the last five years as its EBITDA margin fell by 28.1 percentage points
Black Stone Minerals is trading at $14.80 per share, or 13.9x forward P/E. Dive into our free research report to see why there are better opportunities than BSM.
One Energy Stock to Buy:
Permian Resources (PR)
Market Cap: $17.58 billion
Controlling roughly 450,000 net acres in America's most productive oil patch, Permian Resources (NYSE: PR) is an oil and natural gas producer that drills wells and extracts hydrocarbons from underground reservoirs in West Texas and New Mexico.
Why Are We Bullish on PR?
- Annual revenue growth of 44.4% over the last ten years was superb and indicates its market share increased during this cycle
- Highly-profitable operating model results in strong unit economics and a best-in-class gross margin of 75.7%
- Strong free cash flow margin of 27% enables it to reinvest or return capital consistently
Permian Resources’s stock price of $20.96 implies a valuation ratio of 9.6x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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