For the most part, we all like to talk about the companies that we like or the ones that we are invested in. On the other hand, though, there are companies that we hate, and as investors we wouldn't touch them with a 30-foot pole.
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There are lots of reasons to hate a company. Perhaps there's a bloated balance sheet, it's undergoing a major overvaluation, or the market for its products is slowly deteriorating. So we asked a few of our analysts in the energy space to explain a company they each hate and why you should stay away from them at all costs.
Jason Hall:Seadrill , because management really dropped the ball on capital allocation, back when they had time to be more conservative.
The offshore drilling business is in terrible shape right now, with onshore production levels growing more than enough to meet the slowing pace of demand growth, but Seadrill's ultra-modern fleet should be the best-positioned operator to ride out this downturn.
However, management continued paying an exorbitant dividend that at one point was worth nearly 20% in yield. The huge debt burden the company must service, the weakness in the market -- which could last another year -- and the fact that the company must take on evenmoredebt to pay for another 18 ships it has committed to buy, essentially forced the company to halt payments. The reality? It should have been cut months ago.
The result? The stock has been absolutely crushed:
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I've beenworriedabout Seadrill'spoor capital managementfor some time, and cautioning income investorsas far back as Juneabout taking too big a stake in the company. I really want to love Seadrill, but right now, I just can't. Management has to prove it can allocate capital in a more conservative manner.
Matt DiLallo: There's a whole subset of energy stocks that I despise: smaller oil-field service stocks. These are companies such as Key Energy Services,Basic Energy Services,C&J Energy Services and the energy stock I hate the most,Nuverra Environmental Solutions, which all have low margins that are really crushed when energy prices drop. It's why these stocks are all off by more than 50% so far this year.
Oil-field service companies operate in a tough business. It's a highly competitive industry with relatively low barriers to entry. Not only that, but these companies also have high capital costs, as they need to buy expensive trucks and equipment to service well sites. This combination of factors forces these companies to keep their prices low to get business, which isn't exactly good for margins. This business model doesn't really work all that well in good times, while it's a recipe for disaster when times are tough.
Meanwhile, if a company's not well managed -- cough, Nuvarra, cough -- it's easy for investor capital to be absolutely obliterated. One bad deal bought on a company's credit line can really put these companies in a hole that can be too deep to get out of. This is why it's better to stay away from small oil-field services. In good times, the reward is that the industry attracts more competitors instead of more profits, while the risk is a stock price that often bottoms around zero when things go bad.
Tyler Crowe: Some might accuse me of being some super-green environmentalist because I'm picking a coal company here. But trust me, the reasons to not like Alpha Natural Resources run much deeper than its product.
Let's start with the coal industry in general. Demand for coal is still pretty robust in the U.S., albeit on a slow decline as natural gas and renewable energy start to capture greater market share. However, the coal fueling power plants is coming less and less from the Appalachian region -- a region where Alpha gets a lot of production. Mines in this region have been habitually suffering from higher production costs in comparison with its competition in the Illinois Basin and Powder River Basin. As more and more production comes from these parts of the country, it's putting immense amount of pressure on the price of Appalachian coal and has caused many of the mines in Appalachia to be no longer economical.
To add insult to injury, Alpha Natural's financials have been bordering on disaster for quite some time. The company hasn't generated earnings in close to four years now, and cash from operations hasn't been able to keep pace with capital expenditures since 2012. What's even worse, though, is that the company is trying to dig itself out from under a massive debt load: Net debt is 13 times greater than EBITDA, and interest expenses have outpaced EBITDA for several quarters. There might be a select few companies that will last a while longer in the coal business, but Alpha is looking less and less like a company that will be one of them.
The article 3 Energy Stocks We Love to Hate originally appeared on Fool.com.
Jason Hall andTyler Crowe own shares of Seadrill.Matt DiLallo owns shares of Seadrill and has options on Nuverra Environmental Solutions.The Motley Fool recommends and owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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