Energy businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Still, their generally high capital requirements expose them to the ups and downs of commodity prices and economic cycles, and the industry’s six-month return of 6.3% has fallen short of the S&P 500’s 14% rise.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here are two energy stocks boasting durable advantages and one that may face trouble.
One Energy Stock to Sell:
Northern Oil and Gas (NOG)
Market Cap: $2.67 billion
Taking the path less traveled in the oil industry by choosing not to operate its own wells, Northern Oil and Gas (NYSE: NOG) acquires minority stakes in oil and gas wells operated by other companies across major U.S. shale basins.
Why Are We Cautious About NOG?
- Efficiency has decreased over the last five years as its EBITDA margin fell by 22.9 percentage points
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Northern Oil and Gas’s stock price of $25.39 implies a valuation ratio of 5.7x forward P/E. If you’re considering NOG for your portfolio, see our FREE research report to learn more.
Two Energy Stocks to Buy:
Diamondback Energy (FANG)
Market Cap: $55.15 billion
Sporting one of Wall Street's most memorable ticker symbols, Diamondback Energy (NASDAQ: FANG) drills for and produces oil and natural gas from underground rock formations in the Permian Basin of West Texas and New Mexico.
What Makes FANG Stand Out?
- Annual revenue growth of 44.7% 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 79.8%
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $197.07 per share, Diamondback Energy trades at 10.2x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
Texas Pacific Land (TPL)
Market Cap: $23.95 billion
One of America's largest private landowners with roughly 868,000 acres in the Permian Basin, Texas Pacific Land (NYSE: TPL) owns land in West Texas and earns revenue from oil and gas royalties, water services, and land leases.
Why Will TPL Outperform?
- Annual revenue growth of 31.1% 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 94.9%
- Strong free cash flow margin of 63% enables it to reinvest or return capital consistently
Texas Pacific Land is trading at $348.50 per share, or 24.3x forward EV-to-EBITDA. Is now the time to initiate a position? Find out in our full research report, it’s free.
Stocks We Like Even More
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