The energy industry is undergoing a seismic shift in response to climate change concerns and the sustainability of fossil fuels. Although most, if not all, energy stocks are affected, these energy stocks to avoid also have other issues.
As the world moves toward cleaner energy sources, the demand for fossil fuels is expected to decrease over time. This could lead to reduced revenues and profits for companies heavily reliant on traditional energy sources.
Energy companies perceived as contributing to environmental problems or failing to address sustainability concerns may also face reputational risks, including being left out of institutional portfolios.
Energy stocks are also known to pay quality dividends. Still, the incoming energy transition may jeopardize their safety and remove another layer of attractiveness for firms that cannot reliably keep increasing or paying them.
Given all these risks and more, it makes sense to stick to the companies likely to navigate this transition. So here are the three energy stocks to avoid.
PBF Energy (PBF)
PBF Energy (NYSE:PBF) is an independent petroleum refiner and supplier. Its weak fundamentals include inconsistent profitability, fluctuating margins and potential declines in oil demand that may hinder its growth and financial stability.
In my view, balance street strength will be a key determinant in the energy transition. In PBF’s case, things look bleak, with more debt than cash on its balance sheet, giving it a net cash position of -$248.50 million or -$2.08 per share.
A weak free cash flow margin of 0.54% over the last 12 months and single-digit gross and operating margins also further the bear case.
Its relatively low valuation ratios suggest it will continue to be a slow burner, as it trades at just 0.18 times sales and 3.5 times earnings.
These weaknesses all contribute to a bleak picture for PBF, making it one of those energy stocks to avoid.
CVR Energy (CVI)
CVR Energy (NYSE:CVI) is a diversified holding company that manufactures petroleum refining and nitrogen fertilizer.
In its most recent quarter, CVI reported earnings per share of $0.04, falling short of the analyst estimate of $0.18. The company’s revenue stood at $1.86 billion, 4.95% lower than the estimated $1.96 billion, indicating a weaker-than-expected financial performance.
I’ve said this before, but the energy industry’s main drawcard for many investors is the dividends these companies pay. CVI pays an inconsistent dividend as a relatively small stock, with many years of zero or negative growth.
CVI has also been disappointing on the capital appreciation front, with its stock price declining 17.78% over the past five years. By comparison, Chevron (NYSE:CVX) saw its stock price climb 41.84% over the same period, not including its substantial dividend.
The opportunity cost is then substantial for holding CVI on both a capital return and income front, and forecasts don’t suggest this will change soon.
Green Plains (GPRE)
Green Plains (NASDAQ:GPRE) is a renewable energy company specializing in ethanol production.
GPRE is risky, but it is in the right direction for investors betting on the energy transition. Analysts overwhelmingly support a bull case for GPRE, suggesting that its stock price will surge 73.28% within the next 12 months. This also comes with a “Strong buy” rating.
However, GPRE’s valuation is too rich at $21 per share at the time of writing. The company has negative accounting profits and a negative free cash flow. The optimism for the stock seems to be at least partially based on analyst forecasts, suggesting an EPS surge 246.65% to 2.25 next year.
These forecasts are speculative and become an issue if the business cannot perform to a very high standard, sending its stock price six feet under in the short term if things don’t go as planned.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.