StockStory recommends SM Energy and California Resources as energy stocks with potential for market-beating returns, while advising investors to avoid Golar LNG. The analysis contrasts these companies against a broader energy sector that has remained flat over the past six months, a period during which the S&P 500 rose by 6.8%.
Energy businesses support physical infrastructure, from vehicles to e-commerce, but their performance is often tied to economic cycles. StockStory argues that while many firms struggle with these dynamics, a select few high-quality operators can maintain earnings growth regardless of the economic environment.
SM Energy, with a market capitalization of $9.54 billion, explores for and produces oil, natural gas, and natural gas liquids primarily from shale formations in Texas and Utah. The company controls over 328,000 net acres across three key regions. StockStory highlights SM Energy's 16.7% annual revenue growth over the last ten years as exceptional, noting that the company has increased its market share during the current cycle. The firm operates with a best-in-class gross margin of 86.8%, which StockStory describes as a highly profitable operating model with strong unit economics. This efficiency allows SM Energy to generate significant free cash flow, providing flexibility to reinvest in growth or return capital to shareholders. The stock is priced at $40.48 per share, implying a valuation ratio of 4.5x forward P/E.
California Resources, valued at $4.84 billion, operates some of California's most productive oil fields, including Elk Hills and Belridge. The company explores for and produces crude oil, natural gas, and natural gas liquids across the state. StockStory favors California Resources for its 7.1% annual revenue growth over the last ten years, which has contributed to an increased market share this cycle. The company maintains a top-tier gross margin of 56.1% due to excellent production efficiency. Additionally, a strong free cash flow margin of 13.2% enables consistent reinvestment or capital returns. California Resources trades at $54.53 per share, or 14.3x forward P/E.
In contrast, StockStory advises against Golar LNG, which has a market capitalization of $4.66 billion. Golar LNG converts ships into floating liquefied natural gas facilities to process stranded gas reserves at offshore sites. The firm cites concerns over Golar LNG's annual revenue growth of 2.8% over the last five years, which it deems below standards for the energy upstream and integrated energy sector. StockStory also points to a history of cash burning that raises doubts about the long-term viability of the business model. There is a risk that depleting cash reserves could trigger a fundraising event leading to shareholder dilution. Golar LNG shares are priced at $45.82, trading at 133.3x forward P/E.