Today made a lot of energy investors happy. Energy stocks across the board rallied on speculation that some of the world’s largest oil producers will finally agree to curb production at an upcoming meeting this weekend. In addition, some of Russia’s top officials made cautiously optimistic projections about increasing oil prices.
These developments have convinced some traders that global oil prices have bottomed out. And some analysts have jumped on the bandwagon, as a number of energy companies were upgraded. Notably, Tudor Pickering upgraded Chesapeake Energy Corp. (CHK) from a sell to a hold, after the company announced that it will be able to keep its $4 billion credit base through 2019. Shares promptly surged 33% on the news.
A few other big names logged double-digit gains today, including Marathon Oil Corp. (MRO), which jumped 12% and Seadrill Ltd. (SDRL), which surged 24%.
As to be expected, these developments filled my inbox with questions. Is it time for me to do away with my moratorium on oil stocks? Are energy stocks good bargain buys? Are we missing out on their juicy dividend yields?
If you’ve been tempted to buy energy stocks, here are a few things to keep in mind:
- Energy stocks are not the bargain that they appear to be. Even after losing nearly two-thirds of its value over the past 12 months, Chesapeake Energy still trades at over 15 times forecasted earnings. And here’s the thing: Analysts are still trying to get a handle on their forward EPS projections, so CHK’s valuation could be even higher. Meanwhile, CHK is a D-rated Sell.
- The energy sector is still plagued by horrific sales and earnings. This quarter, Seadrill is headed for a 27.9% year-on-year drop in sales, and a 45.1% year-on-year drop in earnings. The Oil & Gas industry as a whole is expected to see earnings plunge 24.9%. SDRL barely squeaks by with a C-rating overall, but given its D-rated Fundamental Grade, it wouldn’t take much for it to fall into sell territory.
- Dividends are no longer guaranteed in the energy sector. Last October, Marathon Oil slashed its quarterly dividend from $0.21 to $0.05 per share—a 76% cut! Things have been so tight at Marathon that it hasn’t been able to increase its dividend since then. So it’s small wonder that MRO is an F-rated Strong Sell.
We’ll see how things shake out on Sunday, but I’m not holding my breath. Given the current global conditions, I expect that crude prices will stay low for the foreseeable future. Energy stocks dominate the F-rated stocks in both Portfolio Grader and Dividend grader; there’s just too much downside risk in the market for these positions to be anything but a sell. So, I advise everyone to continue to avoid energy and commodities stocks.