1 Energy Stock to Own for Decades and 2 That Underwhelm

Energy businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But their prominence also brings high exposure to the ups and downs of economic and energy cycles. Luckily, the tide is turning in their favor as the industry’s 32.1% return over the past six months has topped the S&P 500 by 21.1 percentage points.

Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. Taking that into account, here is one energy stock boasting a durable advantage and two we’re passing on.

Two Energy Stocks to Sell:

Seadrill (SDRL)

Market Cap: $2.99 billion

Operating in water depths reaching 12,000 feet below the surface, Seadrill (NYSE:SDRL) owns and operates drillships and semi-submersible rigs that drill oil and gas wells in deepwater offshore locations.

Why Do We Avoid SDRL?

1. Annual sales declines of 9.6% for the past ten years show its products and services struggled to connect with the market during this cycle
2. Gross margin of 34.8% is below its competitors, leaving less money to invest in exploration and production
3. Negative free cash flow raises questions about the return timeline for its investments

Seadrill is trading at $47.81 per share, or 30x forward P/E. To fully understand why you should be careful with SDRL, check out our full research report (it’s free).

RPC (RES)

Market Cap: $1.48 billion

Operating primarily in the Permian Basin with 10 hydraulic fracturing fleets, RPC (NYSE:RES) provides specialized services and equipment like hydraulic fracturing, coiled tubing, and cementing to help oil and gas companies complete and maintain wells.

Why Does RES Worry Us?

1. Revenue base of $1.75 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Costly operations and weak unit economics result in an inferior gross margin of 28.1% that must be offset through higher production volumes
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.9% for the last five years

At $6.78 per share, RPC trades at 0.8x forward price-to-sales. If you’re considering RES for your portfolio, see our FREE research report to learn more.

One Energy Stock to Buy:

Texas Pacific Land (TPL)

Market Cap: $25.4 billion

One of America's largest private landowners with roughly 868,000 acres in the Permian Basin, Texas Pacific Land (NYSE:TPL) owns land in West Texas and earns revenue from oil and gas royalties, water services, and land leases.

Why Do We Love TPL?

1. Annual revenue growth of 31.3% over the last ten years was superb and indicates its market share increased during this cycle
2. Highly-profitable operating model results in strong unit economics and a best-in-class gross margin of 94.9%
3. Robust free cash flow margin of 62.6% gives it many options for capital deployment

Texas Pacific Land’s stock price of $371.58 implies a valuation ratio of 30.4x forward EV-to-EBITDA. Is now a good time to buy? Find out in our full research report, it’s free.

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