Using the Energy Select Sector SPDR ETF (NYSEARCA:XLE) as a barometer, it’s accurate to say oil stocks are enjoying a near-term renaissance. XLE, the largest exchange-traded fund dedicated to the energy sector, climbed 24% higher this month.
That’s undeniably good news, although recent price action has shaken up the chart. But this news isn’t perfect. The issue is the point from which oil stocks are rallying, and how much more work they have to do. Year-to-date, each of the 10 worst-performing ETFs either have some oil exposure or are directly linked to crude.
With prices still low and demand only recently showing signs of life, the energy sector still has a lot of work to do to reclaim lost glory. Another issue to consider is the resiliency of some energy companies. No, the likes of Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) aren’t on the brink. But some energy producers are.
Here are seven oil stocks investors should sell now.
- Chesapeake Energy (NYSE:CHK)
- Apache (NYSE:APA)
- Callon Petroleum (NYSE:CPE)
- Extraction Oil & Gas (NASDAQ:XOG)
- Gulfport Energy (NASDAQ:GPOR)
- Nabors Industries (NYSE:NBR)
- SM Energy (NYSE:SM)
Oil Stocks: Chesapeake Energy (CHK)
Chesapeake Energy has been making some jaw-dropping moves higher. That makes it difficult to say the stock should be shorted from here. Add to that, this oil stock notched a roughly nine-fold jump off its 52-week low.
Like some of the other beaten-up names in the energy patch, Chesapeake got a lift on news that OPEC agreed to a production cut. Those headlines are always catalysts for oil equities. But the trick is getting all the cartel’s member states to actually comply.
OPEC cuts are not enough to eradicate Chesapeake’s mountain of liabilities and the issue of an imminent bankruptcy filing. When it comes to ability to survive, this is one of the more challenged names in the sector. And, if a Chapter 11 filing happens, Chesapeake becomes beholden to creditors while common equity investors get wiped out.
Exploration and production firm Apache is another oil stock that’s notching a stunning rally. In this case, the stock more than quadrupled in less than three months. The chart indicates if the 200-day moving average is taken out, more upside is available.
Apache isn’t anywhere close to as imperiled as Chesapeake is, but in this environment, credit is leading equity. What that means is that companies need to oblige bondholders with better cash flow and stronger balance sheets. Moody’s Investors Service has some doubts about Apache, as highlighted by a recent downgrade that took the energy producer into junk territory.
“The downgrade of Apache to Ba1 reflects our expectation of higher leverage on production and reserves that we don’t expect to reverse over the medium term,” said Pete Speer, Moody’s Senior Vice President. “The company’s returns and cash flow based leverage metrics will improve in line with the recovery in oil prices, but those metrics…
Read More: 7 Oil Stocks That Are Struggling to Survive