As the stock market navigated a bearish terrain in 2022, the energy sector emerged as a beacon of hope, outshining other asset classes. Fast forward to the present, and a stark reversal is underway. Surging oil prices have plummeted profits for energy producers amidst escalating concerns over shifting market demands and the global shift towards cleaner energy sources. The once-proud energy stocks have now found themselves relegated from premiere positions to cellar-dweller status. The S&P 500 Energy Index, a former champion, has managed a meager 2% uptick over the past year, a far cry from the benchmark S&P 500 index’s 27% surge. With the industry contending with a severe downturn, it’s time to hit the brakes. Here’s a rundown of three questionable energy stocks slated for the chopping block in February.
Diamondback Energy (FANG)
The journey of Diamondback Energy’s (NASDAQ:FANG) stock has been a rollercoaster ride, propelled by the announcement of its $26 billion cash-and-stock acquisition of Endeavor Energy Partners. While investors hailed the deal, a looming regulatory cloud has cast a shadow over the proceedings. Antitrust watchdogs are poised to scrutinize the Endeavour Energy purchase intently, given its position as a leading player in the Permian Basin, the epicenter of US oil and gas production. Endeavour Energy’s vast operations in the Midland, Texas region could significantly bolster Diamondback Energy’s footprint in the area, yet regulatory approval remains uncertain. Diamondback’s move follows on the heels of Exxon Mobil’s $60 billion buyout of Pioneer Natural Resources and Chevron’s $53 billion acquisition of Hess, signaling a broader consolidation trend within the U.S. energy landscape. A culmination of these industry evolutions could eventually prompt regulatory intervention in the sector as well. FANG stock has enjoyed a 14% rally thus far in 2024.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) may have caught the eye of renowned investor Warren Buffett, but its stock performance continues to falter. Year to date, OXY stock has only managed a modest 1% uptick, painting a bleak picture of its track record. Despite appearing attractively priced at 15 times future earnings projections, Occidental Petroleum’s investment returns have been lackluster, with its stock languishing at the same level as the spring of 2019, before the disruptive onset of the COVID-19 pandemic. In a bid to spur growth, much like Diamondback Energy, Occidental Petroleum is also engaged in a Permian Basin deal with the acquisition of CrownRock, a private energy producer, in a deal amounting to $12 billion. The acquisition promises to append over 94,000 net acres of prime Permian Basin land to Occidental’s portfolio, the largest oil-rich region in the United States. However, the impending deal also comes with a heavy price tag of $9.1 billion in new debt. News of the CrownRock agreement has already taken its toll on OXY stock, which witnessed a 1.2% decline following the debt-laden acquisition announcement.
The Dimming Light of British Petroleum (BP)
Facing Financial Headwinds
British Petroleum (NYSE:BP), the historical European energy behemoth, is currently facing a perfect storm of financial challenges. With the company’s net profit plummeting to $13.80 billion last year, only half of the peak $27.70 billion achieved in 2022 during the heyday of $100-per-barrel oil prices, BP finds itself navigating rough waters.
Debt, Leadership, and Shareholder Dismay
Besides the harsh financial realities, BP finds itself grappling with substantial debt amounting to nearly $21 billion. The recent leadership shakeup, with new CEO Murray Auchincloss replacing former CEO Bernard Looney, who left amidst controversy, adds another layer of uncertainty to the mix.
Stock Buybacks: A Fragile Beacon
In an attempt to appease shareholders during these turbulent times, BP has announced a stock buyback program amounting to $3.50 billion in the first half of this year. The company plans to extend this initiative to repurchase a total of $14 billion worth of its own shares by 2025. However, these efforts, while commendable, may do little to mask the broader issues of declining revenues and a plummeting stock price.
Investors, wary of the company’s shaky financial footing, are advised to approach BP stock with caution. The road ahead for British Petroleum seems foggy, with storm clouds on the horizon.
On the date of publication, Joel Baglole did not have (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.
