3 Energy Stocks to Exit Right Away

Stocks to sell

Crude oil futures have risen by nearly 10% since the turn of the year. This has resulted in a broad-based uptick in energy stock prices echoed by Vanguard Energy Index Fund ETF Shares’ (NYSEARCA:VDE) 2% year-to-date gain. This is not spelling great things for energy stocks.

Although respectable, the sector’s year-to-date progress can be misinterpreted. Sure, energy is a utility; therefore, demand will always be somewhat intact, and sure, global geopolitical conflict has constrained supply. However, the fact of the matter is that energy stocks are highly sensitive to the economic cycle.

A global interest rate pivot is nearing, and year-over-year inflation is trending downward. Therefore, an argument exists that an economic slowdown is set to occur. Energy stocks will plummet in the event of a slowdown due to compressed commodity prices paired with reduced output. Moreover, an economic slowdown will likely outweigh supply-chain bottlenecks to phase out supply-driven price support.

With the aforementioned considered, here are three energy stocks to exit before it’s too late!

Occidental Petroleum (OXY)

Source: Pavel Kapysh / Shutterstock.com

Occidental Petroleum’s (NYSE:OXY) short interest has ticked up to 5.95%. This makes it the most shorted oil and gas stock in the S&P 500. In addition, OXY stock’s Put-Call ratio has risen to 1.2 times. This suggests traders have hedged their bets for the time being.

Furthermore, Occidental Petrolium’s fundamentals are weakening. The company released its fourth-quarter results earlier this month, revealing a $660 million revenue target beat. However, its year-over-year performance clearly tapered. For example, Occidental Petroleum’s total oil and gas sales slipped by 13.9%, chemical sales by 16.4%, and midstream and marketing by 18.5%. On top of that, Occidental Petroleum has decided to cut production at two shale rigs. These were in the Permian Basin to cut back on costs.

Occidental Petroleum’s latest results are typical of an oil and gas company’s results pre-economic slowdown. I’m not by any stretch implying that Occidental Petroleum has turned into a bad company. I’m just wary of the economic cycle and OXY stock’s susceptibility to it.

Lastly, a look at OXY stock’s price-to-book ratio of 2.43 times shows that it is fundamentally overvalued. Additionally, OXY’s forward dividend yield of 1.45% isn’t sufficient to add a floor to its stock price in the event of a downturn.

I’d sell OXY stock if I owned it.

Devon Energy Corporation (DVN)

Source: T. Schneider / Shutterstock.com

Devon Energy (NYSE:DVN) released its fourth-quarter earnings on Tuesday, and its stock ticked down by approximately 1% in pre-market trading on Wednesday morning.

Similarly to OXY, Devon Energy beat estimates but delivered weaker year-over-year results. According to its fourth-quarter report, Devon Energy’s oil, gas, and NGL sales slumped by 12.8%, while its marketing and midstream revenues softened by 10.6%. Although Devon Energy’s production remains intact, production will likely taper in the coming year to cut back on costs instead of relying on an inflation pass-through model. Thus, I anticipate sluggish sales figures for the remainder of 2024.

On a positive note, Devon Energy repurchased $234 million in shares during its fourth quarter and possesses a forward dividend yield of 1.81%. However, DVN stock’s price-to-book ratio of 2.44 times shows that it is grossly overvalued.

DVN stock has slid by approximately 10% in the past six months, and it’s time to sell before it reaches total capitulation.

Sasol Limited (SSL)

Source: Shutterstock

Sasol Limited (NYSE:SSL) is a high-beta stock suitable for risk-seeking investors. Although high-beta securities can deliver stellar results in bull markets, their downside capture can be substantial in down markets as stock market returns are geometrically linked. As such, a comprehensive analysis is required before engaging with this stock.

As with OXY and DVN, my bearish outlook on Sasol is systematically driven. However, I also identified a few idiosyncrasies to look out for.

Firstly, some of Sasol’s energy operations span South Africa and Mozambique, two areas in volatile election years. South Africa’s pro-nationalization Economic Freedom Fighters (EFF) has gained immense popularity lately, adding a significant risk premium to Sasol’s South African assets. In addition, Sasol’s Mozambique projects could be subject to hold-ups as rumors of expected election rigging could introduce local unrest among its labor force.

Furthermore, Sasol reported its first-half results this month, revealing a 35% year-over-year decrease in earnings-per-share, leading to a 71% dividend cut to bring its forward dividend yield down to 2.7%. Furthermore, Sasol suffered approximately $226 million in impairments during its first half. The company’s ongoing struggles with impairments are becoming a serious concern as they have contributed to a near 50% year-over-year stock price decline.

SSL stock’s price-to-book ratio of 0.43 times may lure some investors in. However, I think this stock has “value trap” written all over it!

On the date of publication, Steve Booyens 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.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London. Furthermore, Steve has passed CFA Levels 1 & 2 and is working toward his Ph.D. in Finance. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, REITs, fixed-income funds, CEFs, and ETFs.

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