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.Their momentum is also rising as lower interest rates, as well as AI energy needs, have incentivized higher capital spending. As a result, the industry has posted a 12.6% gain over the past six months, beating 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. With that said, here are three energy stocks we’re passing on.
Murphy Oil (MUR)
Market Cap: $5.48 billion
Operating in waters over a mile deep in the Gulf of Mexico and extracting hydrocarbons from tight shale rock formations in Texas, Murphy Oil (NYSE: MUR) explores for and produces crude oil, natural gas, and natural gas liquids from fields in North America and Asia.
Why Does MUR Give Us Pause?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 11.7 percentage points
At $38.72 per share, Murphy Oil trades at 9.7x forward P/E. Read our free research report to see why you should think twice about including MUR in your portfolio.
Kodiak Gas Services (KGS)
Market Cap: $5.79 billion
Dominating the Permian Basin with a fleet focused on large horsepower units exceeding 1,000 horsepower each, Kodiak Gas Services (NYSE: KGS) operates compression equipment that maintains natural gas pressure for production, gathering, and transportation.
Why Is KGS Not Exciting?
- Smaller revenue base of $1.32 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Costs have risen faster than its revenue over the last five years, causing its EBITDA margin to decline by 3.7 percentage points
- Poor free cash flow margin of 5.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Kodiak Gas Services is trading at $58.27 per share, or 20.7x forward P/E. Dive into our free research report to see why there are better opportunities than KGS.
Atlas Energy Solutions (AESI)
Market Cap: $1.29 billion
Building the world's first long-haul proppant conveyor system to reduce truck traffic, Atlas Energy Solutions (NYSE: AESI) mines and processes sand used as proppant to prop open fractures in oil and gas wells during hydraulic fracturing.
Why Are We Bearish on AESI?
- Revenue base of $1.06 billion 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 29.6 percentage points
- Negative free cash flow raises questions about the return timeline for its investments
Atlas Energy Solutions’s stock price of $10.42 implies a valuation ratio of 7.6x forward EV-to-EBITDA. To fully understand why you should be careful with AESI, check out our full research report (it’s free).
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