Despite the oil and gas sector having a strong year so far, there are still stocks to avoid.
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If you follow the market, the bear list for oil and gas stocks may seem strange. Considering his two major indicators of oil prices — West Texas Intermediate (WTI) and Brent crude oil — the price of this commodity is rising steadily in 2024. For some perspective, as of last Friday, WTI is up 17% year-to-date and Brent crude is up 16%. Similarly, S&P Oil & Gas Exploration & Production ETFThe company, which owns 55 oil and gas exploration and production companies, is up more than 15% year-to-date as of last Friday. This further emphasizes the point that many oil and gas stocks are doing well. But there are still certain oil and gas stocks to avoid.
Ongoing geopolitical conflicts in the Middle East and various supply cuts initiated by OPEC in 2023 are the main reasons for the rise in global oil prices. Of course, just because most oil and gas companies are doing well these days doesn’t mean there aren’t some companies investors should avoid in the short term. Warning signals that the stock market will eventually crash are still flashing, especially as the Federal Reserve continues to raise the federal funds rate and U.S. stocks trade at frothy multiples. If a crash is imminent, these are three oil and gas stocks to avoid.
ExxonMobil (XOM)
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exxon mobil (New York Stock Exchange:XOM) is one of the most prolific (and notorious) oil and gas companies in the United States. This vertically integrated giant does everything from exploration, production, refining, and marketing of a variety of oil and gas products. The oil giant is diversifying not only in terms of vertical integration, but also geographically. There’s a good reason why the South American nation of Guyana is in the oil market news. The country has 11 billion barrels of oil reserves off its coast, and ExxonMobil is making good use of them. “ExxonMobil Guyana is Guyana’s first and largest oil producer,” the company boasts on its website.
Geographical dispersion is particularly important when discussing non-renewable resources. But all is not well for ExxonMobil. In its first quarter earnings report, net income fell 28% due to lower natural gas prices and tighter margins at Exxon’s refinery business. A stock like ExxonMobil is a good investment if it generates significant net income for shareholders. If natural gas prices continue to fall, which could happen if the U.S. economy continues to slow, Exxon will become less attractive as an equity investment.
Philips 66 (PSX)
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phillips 66 (New York Stock Exchange:PSX) is a diversified petroleum and chemical giant. The company primarily operates midstream oil businesses, helping transport crude oil and supplying refined petroleum products to markets. The company’s chemicals business manufactures and sells a variety of chemicals used by miners and drillers in their operations. Through business diversification, Phillips 66 was able to generate billions of dollars in net income. In 2023, Phillips 66 he generated net income of over $7 billion.
Unfortunately, like ExxonMobil, Phillips 66 also ran into some profitability issues in 2024. Phillips 66’s first quarter earnings resulted in unadjusted net income of $748 million. This figure is nearly a third smaller than his $1.9 billion that Phillips 66 reported for his first quarter of 2023. The company’s midstream and refining divisions took the biggest hit in terms of margins and revenue, while the chemical division saw modest revenue increases year over year.
Phillips 66’s stock price has continued to decline significantly since then, and it’s clear that investors are not satisfied with this result. Again, it’s best to avoid oil and gas stocks that are earning less than they used to, especially during times of market volatility.
Recon Technology (RCON)
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reconnaissance technology (NASDAQ:RCON) is a penny stock that investors should avoid holding up their money. Founded in 2009, Recon develops in situ oil extraction equipment and software. Being a capital-intensive business, profit is everything, and Recon Technology missed the mark. Like many companies in the oil and gas sector, 2022 was a strong year for oil rig companies’ net profits, but 2023 saw significant compression in both sales growth and profit margins.
Investors may likely expect strong returns for some time. The oil and gas market could start to cool down, and there are many talented companies in the oil rig sector with better financial numbers. Needless to say, penny stocks can make for great volatility strategies, but the lack of liquidity combined with the crumbling fundamentals of Recon’s business make betting on this stock unattractive.
On the date of publication, Tyrik Torres did not have (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com Publishing Guidelines.
