7 Energy Stocks to Avoid in an Economic Downturn

Includes: APC, BHI, COG, HAL, HP, NOV, TSO
by: Parsimony Investment Research

The U.S. economy continues to have significant headwinds (e.g., high unemployment, end of QE2, weak housing market, high debt levels, European contagion fears, slowdown in China, etc.), and signs are definitely pointing toward further weakness in the equity market.

Another economic downturn will certainly lead to lower oil prices. We believe that oil prices could be in the low to mid $80s by year's end. While lower oil prices may be good for the consumer (and hopefully the economy), companies that benefit from higher oil prices don't fare so well when prices decline.

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We caution investors to avoid (or hedge) stocks with a high correlation to oil prices as we feel that these companies have a very imbalanced risk/reward profile. The following energy stocks have a correlation coefficient (with oil prices) greater than 0.50.

Note: Correlation coefficients range from -1.0 to +1.0. The closer it is to +1 or -1, the more closely the two variables are related.

On average, the stocks above are trading 110.8% above their 52-week lows. As such, we feel that the downside risk with these stocks is much greater than the upside return potential. In addition, due to inherent commodity price risk, these stocks have an average beta of 1.41. In general, companies with high betas will tend to be more volatile than the general market (which is not ideal in an economic downturn).

A Deeper Look...

Below is a deeper look at each of the companies in the table above, including key fundamental and technical data that investors should factor into their analysis.

Note: While the data below is important to review, the primary reason we feel that investors should avoid these stocks is because of our view that oil prices will be significantly lower by year end. All of the stocks above are highly correlated with oil prices. That said, an economic slowdown and lower oil prices will wreak havoc on these companies financially...so keep an eye on the fundamentals as well over the next few quarters...

Anadarko Petroleum Corporation (NYSE:APC) engages in the exploration and production of oil and gas properties primarily in the United States, the deepwater of the Gulf of Mexico, and Algeria. It markets natural gas, crude oil, condensate, and oil and natural gas liquids (NGLs), as well as owns and operates natural-gas gathering, processing, treating, and transportation systems.

Baker Hughes Incorporated (NYSE:BHI) supplies wellbore related products, and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the oil and natural gas industry worldwide. It also provides products and services to the downstream refining, and process and pipeline industries.

Cabot Oil & Gas Corporation (NYSE:COG) operates as an independent oil and gas company in the United States. The company engages in the development, exploitation, exploration, production, and marketing of natural gas, crude oil, and natural gas liquids. It holds reserves in north region comprising Appalachian and Rocky Mountains areas; and south region consisting of Anadarko basin with Texas and Louisiana areas. The company also transports, stores, gathers, and purchases natural gas for resale.

Halliburton Company (NYSE:HAL) provides various products and services to the energy industry for the exploration, development, and production of oil and natural gas worldwide. It operates in two segments, completion and production, and drilling and evaluation.

Helmerich & Payne, Inc. (NYSE:HP) engages in the contract drilling of oil and gas wells in the United States and internationally. The company provides drilling rigs, equipment, personnel, and camps on a contract basis to explore for and develop oil and gas from onshore areas and from fixed platforms, tension-leg platforms, and spars in offshore areas. It conducts domestic land drilling primarily in Oklahoma, California, Texas, Wyoming, Colorado, Louisiana, Mississippi, Pennsylvania, Utah, Arkansas, New Mexico, and North Dakota; and offshore drilling in the Gulf of Mexico, offshore of California, Trinidad, and Equatorial Guinea.

National Oilwell Varco, Inc. (NYSE:NOV) designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide.

Tesoro Corporation (NYSE:TSO) engages in refining and marketing petroleum products. It operates in two segments, Refining and Retail. The Refining segment processes both heavy and light crude oils and produces primarily gasoline and gasoline blendstocks, jet fuel, diesel fuel, and heavy fuel oils. The Retail segment sells gasoline and diesel fuel through company-operated retail stations and third-party branded distributors in the western and mid-continental United States.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.