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With geopolitical tensions and a global economic rebound, 2022 was a year to buy energy stocks. Warren Buffett went on a shopping spree buying oil and gas stocks like Chevron Corporation (NYSE:CVX) and Occidental Petroleum (NYSE:OXY). The current year is likely to be challenging. It’s time to be very selective, and there are energy stocks to sell before they trend lower.
To put things into perspective, Brent oil averaged $100.94 in 2022, while the current year’s average oil price is expected at $83. In a scenario of a deep recession, the correction can be significant. However, I would use any downside to accumulate quality energy stocks.
It’s also important to note that all companies operating in a sector are unequal. There are energy stocks that look attractive despite near-term headwinds. On the other hand, there are energy stocks to sell that represent companies with relatively weaker fundamentals.
Let’s discuss three energy stocks to sell in February in anticipation of a correction.
Diamond Offshore Drilling
Ocean Power Technologies
Tellurian Energy (TELL)
Broad sentiments were largely bullish for oil and gas stocks in 2022. However, Tellurian Energy’s (NYSEMKT:TELL) stock has underperformed with negative returns of 15% in the last 12 months. The downside will sustain, and TELL stock is among the energy stocks to sell in February.
It’s worth noting that U.S. natural gas price has declined below $3. This is the lowest level since May 2021. A key reason for the sharp decline is the warm weather in Europe and U.S. The demand for natural gas has been lower than expected. Lower price realization will impact Tellurian Energy from a fundamental perspective.
As of September 2022, Tellurian Energy reported $600 million in debt (including a financial lease). While the company has a cash buffer of $607 million, the debt-to-EBITDA is likely to be 2.5x or 3.0x as natural gas price declines. Credit stress will increase in 2023 and negatively impact TELL stock.
Diamond Offshore Drilling (DO)
Offshore drilling rig services companies have benefited from oil trading firms. Favorable industry tailwinds have also translated into a swelling order backlog and higher rig utilization. However, it’s time for some caution, and I would sell Diamond Offshore Drilling (NYSE:DO) after a rally of 83% in six months.
It’s worth noting that Brent oil was trading around $98 in the first week of November 2022. Brent has, however, corrected to current levels of $80. Oil & gas companies are likely to be cautious, and this can impact the company’s order intake.
Currently, Diamond Offshore has an order backlog of $2.1 billion. This provides revenue visibility for the coming quarters. However, I would instead look at Transocean (NYSE:RIG), which has an order backlog of over $8 billion. Borr Drilling (NYSE:BORR) looks like a better alternative based on the revenue and EBITDA growth potential.
For the first nine months of 2022, Diamond Offshore reported cash used in the operation of $22 million. If market conditions weaken on a relative basis, the company is likely to leverage or dilute equity. This is another reason to stay away from DO stock for the coming quarters.
Ocean Power Technologies (OPTT)
Let’s also talk about a renewable energy stock that looks weak from a fundamental perspective. Ocean Power Technologies (NYSEMKT:OPTT) stock has corrected by 35% in the last 12 months and trades at 68 cents. With scaling-up and execution still a concern, I expect a further correction in OPTT stock.
As an overview, Ocean Power is an early mover in ocean energy technology. The company provides low-carbon marine data, power, and consulting service solutions.
I believe that there are two major concerns to address. First, the company reported revenue of 0.3 million for Q2 2023, with a total order backlog of $2.3 million. Business scalability is also a concern, and revenue growth has been muted even at a low revenue base.
Furthermore, Ocean Power continues to report an operating level loss. Considering the revenue growth, it’s unlikely that operating leverage will kick in anytime soon. Therefore, with cash burn, I see a further dilution of equity.
On the date of publication, Faisal Humayun 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.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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