Is the rally crude oil about to stall out? After several months of consistent oil price advances, the price of oil has dipped over the past week.
It seems some traders are using the tensions in the Middle East as a “sell the news” event. Particularly if there is de-escalation between Iran and Israel, we might see oil prices retreat at least over the medium term. Broader macroeconomic signs also point to a potential sell-off, especially with interest rates climbing once again.
That could make it a great time to book trading gains in certain energy stocks before market momentum fully reverses. While much of the sector still has strong fundamentals today, other names are on a shakier footing for the time being. Here are three energy stocks to consider selling right now.
TechnipFMC (FTI)
TechnipFMC (NYSE:FTI) is an energy solutions company focused on subsea operations. Deepwater drilling has come back to life after several brutal years for the sector. This is because offshore drilling tends to have higher production costs, as opposed to shale or traditional oil fields. Given the higher cost structure, offshore oil production tends to follow more of a boom-and-bust cycle.
There’s been something of a boom recently with some companies hitting major new fields in places like Guyana and Suriname. However, optimism may be getting overdone for the FTI stock. Shares are up nearly 90% over the last year, with much of that move coming just since February.
That seems like it may be a bit excessive, given that the company was barely profitable last year. Shares also trade a large premium to their book value. This suggests that if oil prices stall out, shares could be in for a major corrective pull back.
Texas Pacific Land (TPL)
Unlike most companies categorized as energy stocks, Texas Pacific Land (NYSE:TPL) is not a traditional oil or gas producer. Rather, the company’s primary asset is a large land holding in the Permian region of Texas. It earns royalties from goods that are produced on its land, such as petroleum.
TPL stock ran up tremendously in past years as investors discovered this unique way to play the shale boom. Undoubtedly, the value of the company’s land appreciated enormously as oil production soared in the region.
However, with the stock up more than double since 2020, it’s fair to argue that shares may be overvalued at around 33 times forward earnings. Adding to that, there’s been significant corporate infighting, as management converted the company from a royalty trust to an operating company, which allowed it to make controversial changes in management compensation and other matters.
Texas Pacific Land continue to generate significant profits from its land holdings. However, the combination of the large increase in the share price and questions around the company’s strategic direction are causes for concern. A decline in oil prices could have Texas Pacific Land shares set for a significant decline.
Occidental Petroleum (OXY)
Trading at 17 times trailing earnings, Occidental Petroleum (NYSE:OXY) has a fairly high P/E ratio compared to most other large oil and gas operators.
The firm’s premium valuation can likely be attributed to the fact that Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B) owns a large stake in the company. Berkshire appears to be making a bet on carbon capture technology, as that’s one place where Occidental has invested heavily in recent years. That makes sense from Berkshire’s perspective, as Buffett’s company has considerable holdings in power utilities, railroads and other industries, all of which produce a lot of pollution.
If Occidental’s carbon capture technology proves to be commercially viable at a large scale and takes off, it could be a boon to Berkshire Hathaway in terms of helping it reach its ESG goals. However, according to a Bloomberg Green investigation, Occidental’s first attempts at carbon capture have fallen well short of intended targets and the technology may face more growing pains before becoming a commercial success.
While Berkshire’s Hathaway’s bet on this technology makes sense within the basis of its broader portfolio, individual energy stock investors may not want to follow Buffett’s lead here. OXY stock is arguably significantly more expensive and riskier than many of its large oil peers.
On the date of publication, Ian Bezek 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.