In this article, we discuss the 10 energy stocks that analysts are downgrading.
Energy stocks have consistently outperformed the broader market for most of this year as demand surges and supply risks increase. On March 23, the benchmark S&P 500 Index fell by around 1.2% but energy futures climbed by more than 5%. The energy futures were lifted after Russia halted loadings at a major Black Sea oil export terminal, depriving the European market of key oil supplies. Russia is using oil as a weapon in the Ukraine war, hitting back at Western sanctions by cutting oil exports to just 1 million barrels per day.
Supply Disruptions Force Rethink in Global Oil Economy
The increased strain on energy reserves in the United States as a result of supply disruptions from Russia, which Middle Eastern countries and US shale producers are working hard to overcome, has cut US crude stockpiles by 2.5 million barrels in a single week. European countries are taking emergency measures aimed at controlling energy prices and preventing the economy from going into a freefall due to rising inflation. The UK government has lowered taxes on gasoline and increased government subsidies for those impacted by higher energy costs.
In recent days, as prospects of a ceasefire in Ukraine increase and oil prices dip, there are reports that the US is considering a record release of oil from the Strategic Petroleum Reserve to stabilize global oil prices. The news comes after OPEC+ nations stuck to a supply agreement for May that raised concerns around a further increase in oil prices. Washington is planning to pour 180 million barrels of oil into the market in the next six months. Goldman Sachs analysts have said the move would rebalance prices in 2022 but was not a “permanent fix”.
In this volatile energy marketplace, analysts have been busy updating their advisories on energy stocks to incorporate recent developments into their estimates. Some of the top energy stocks recently downgraded by analysts include Devon Energy Corporation (NYSE:DVN), ConocoPhillips (NYSE:COP), and Chevron Corporation (NYSE:CVX), among others discussed in detail below.
Our Methodology
The companies that operate in the energy sector and have received a ratings downgrade from market experts in the past few weeks were selected for the list. Data from around 900 elite hedge funds tracked by Insider Monkey in the fourth quarter of 2021 was used to identify the number of hedge funds that hold stakes in each firm.
Photo by Robin Sommer on Unsplash
Analysts Recommend Selling These Energy Stocks
10. TotalEnergies SE (NYSE:TTE)
Number of Hedge Fund Holders: 17
TotalEnergies SE (NYSE:TTE) is an integrated oil and gas firm. The stock has registered a slight downward spiral in the past few weeks as the prices of oil drop below $100 per barrel in the wake of progress in the peace talks between Russia and Ukraine. The firm has stopped purchasing oil and gas from Russia but so far declined to withdraw from assets in the country. Patrick Pouyanne, the CEO of the firm, said at an investor presentation recently that the firm planned to spend over $16 billion in the period between 2023 and 2025 to meet growth targets.
On March 23, Deutsche Bank analyst James Hubbard downgraded TotalEnergies SE stock to Hold from Buy and lowered the price target to EUR48.10 from EUR 53.50, highlighting that the global oil and gas markets were “showing clear signs of increasing underlying tightness” amid the Russian war in Ukraine.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in TotalEnergies SE with 24 million shares worth more than $1.2 billion.
Just like Devon Energy Corporation, ConocoPhillips, and Chevron Corporation, TotalEnergies SE is one of the stocks that elite investors are monitoring amid rising energy prices.
9. DT Midstream, Inc. (NYSE:DTM)
Number of Hedge Fund Holders: 17
DT Midstream, Inc. (NYSE:DTM) provides integrated natural gas services. The firm has been trying to lure investors with a series of confidence-building measures in recent months. These include the approval of a share buyback plan consisting of around 125,000 shares and the raising of the quarterly dividend by 7% to $0.64 per share. The forward yield is also high at around 5.11%.
On March 8, Credit Suisse analyst Spiro Dounis downgraded DT Midstream, Inc. stock to Neutral from Outperform but raised the price target to $58 from $55, citing valuation as the primary reason behind the downgrade and highlighting that the firm was now trading on par with large-cap industry peers, creating a more balanced risk/reward profile for the stock.
At the end of the fourth quarter of 2021, 17 hedge funds in the database of Insider Monkey held stakes worth $493 million in HDT Midstream, Inc., compared to 22 in the preceding quarter worth $482 million.
8. Brookfield Renewable Partners L.P. (NYSE:BEP)
Number of Hedge Fund Holders: 21
Brookfield Renewable Partners L.P. (NYSE:BEP) owns and runs renewable power generation facilities. The firm is one of the most reliable clean energy firms with a dividend history stretching back more than two decades. On February 4, it declared a quarterly dividend of $0.32 per share, an increase of around 5% from the previous dividend of $0.30 per share. The forward yield was 4.01%. The firm has also been exploring acquisitions to fuel growth, buying clean power developer Urban Grid for $650 million in late January as part of this plan.
However, analysts are not impressed by the growth catalysts for Brookfield Renewable Partners L.P. stock. On March 25, investment advisory Industrial Alliance downgraded the stock to Hold from Buy. Analyst Naji Baydoun issued the ratings update.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Select Equity Group is a leading shareholder in Brookfield Renewable Partners L.P. with 1.1 million shares worth more than $40 million.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Brookfield Renewable Partners L.P. was one of them. Here is what the fund said:
“U.S. renewables utility Brookfield Renewable Partners L.P. was another detractor. Brookfield Renewable Partners L.P. is a pure-play renewables operator and developer headquartered in Canada and domiciled in the U.S., focused on international hydro, solar, wind and storage technology. As more private and public institutions announce ambitious carbon reduction initiatives, Brookfield Renewable’s globally diversified, multi-technology renewables business makes it an attractive partner. Its development pipeline stands at 18,000 megawatts, providing confidence the company can meet its targeted double-digit cash flow growth through to 2025. Shares moderated amid expectations of rising bond yields, and a cool-off on the green trade.”
7. Sempra (NYSE:SRE)
Number of Hedge Fund Holders: 31
Sempra (NYSE:SRE) is an energy services holding firm. The company posted earnings for the fiscal year 2021 on February 25, reporting earnings per share of $2.16, beating estimates by $0.16. The revenue over the period was $3.8 billion, up 21% year-on-year and beating expectations by $320 million. The firm is also exploring possible expansion in the natural gas sector as prices in the industry soar. In late January, it signed an MoU with the Federal Electricity Commission in Mexico for the development of natural gas projects in the region.
On March 7, KeyBanc analyst Sophie Karp downgraded Sempra stock to Sector Weight from Overweight without a price target. The analyst cited valuation as one of the main reasons behind the ratings downgrade, noting that the firm would not be able to monetize the newfound strength in the gas market in the near-term.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Zimmer Partners is a leading shareholder in Sempra with 1.6 million shares worth more than $214 million.
In its Q3 2021 investor letter, ClearBridge Investments highlighted a few stocks and Sempra was one of them. Here is what the fund said:
“In utilities we completed the exit of WEC Energy Group to fund our newer position in Sempra Energy. Sempra embodies a similarly, well positioned utility but trades at a meaningfully lower valuation. We are bottom-up investors focused on assembling a diverse portfolio of high-quality companies that can compound dividends at attractive rates over the long term. The portfolio is designed to navigate any environment. The Strategy has generally participated nicely in up markets and protected capital in down markets such as we experienced in the third quarter. As the world navigates its emergence from COVID-19, we believe we are well-positioned.”
6. Marathon Oil Corporation (NYSE:MRO)
Number of Hedge Fund Holders: 40
Marathon Oil Corporation (NYSE:MRO) is an independent oil and gas exploration and production firm. As European powers mulled a ban on Russian energy exports in early March, oil climbed to the highest it had been in two weeks, taking energy giants like Marathon to the top of the leaderboard of the benchmark S&P 500. The boom came merely a few days after crude dropped below $100 per barrel as the geopolitical risk premium faded. Oil had earlier climbed to a 14-year high.
On March 2, Benchmark analyst Subash Chandra downgraded Marathon Oil Corporation stock to Hold from Buy, noting that the valuations of the oil firms were not “extreme in context of current oil prices” but the focus remained on firms that reflected oil prices at around $75 per barrel.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm DE Shaw is a leading shareholder in Marathon Oil Corporation with 7.2 million shares worth more than $119 million.
Along with Devon Energy Corporation, ConocoPhillips, and Chevron Corporation, Marathon Oil Corporation is one of the stocks that institutional investors have on their radar amid rising geopolitical tensions.
5. Diamondback Energy, Inc. (NASDAQ:FANG)
Number of Hedge Fund Holders: 45
Diamondback Energy, Inc. (NASDAQ:FANG) is an independent oil and gas firm headquartered in Texas. As peace talks between Russia and Ukraine show signs of progress, a brief lull in oil prices has once again been replaced by a bull market in light of emerging supply concerns. On February 22, the energy firm, which is trying to establish a dividend legacy, declared a quarterly dividend of $0.60 per share, an increase of 20% from the previous dividend of $0.50. The forward yield was 1.87%.
On March 8, Bank of America analyst Doug Leggate downgraded Diamondback Energy, Inc. stock to Neutral from Buy but raised the price target to $170 from $165, citing “strong share performance and elevated commodity risk” as some of the prime reasons behind the ratings update.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Harris Associates is a leading shareholder in Diamondback Energy, Inc. with 3 million shares worth more than $327 million.
In its Q4 2021 investor letter, Miller Value Partners highlighted a few stocks and Diamondback Energy, Inc. was one of them. Here is what the fund said:
“Diamondback Energy, Inc. returned 14.4% in the quarter as oil price rose and fell during the quarter ending the period largely in the same place that it started. The company reported strong 3Q results beating on the top and bottom line. Diamondback Energy, Inc. reported revenue of $1.9B beating consensus of $1.5B with EPS of $2.94 beating expectations for $2.79. The beat was driven by a combination of higher volumes, higher realizations, and efficiency gains. The company increased its total production guidance for the year to 370-372mboe/d1 (up from 363-370mboe/d) while lowering Capital Expenditure (CAPEX) guidance for the second time this year to $1.49-1.53B. Diamondback Energy, Inc. raised the dividend for the third time this year to $2/share annually while authorizing a new $2B share repurchase program. Starting in 4Q21, the company plans to return 50% of Free Cash Flow to shareholders through the base dividend and a combination of buybacks and special dividends. Finally, the CEO Travis Stice announced plans to reduce methane emissions by 70% as part of the firm’s ESG initiative.”
4. EOG Resources, Inc. (NYSE:EOG)
Number of Hedge Fund Holders: 51
EOG Resources, Inc. (NYSE:EOG) operates as an energy firm with prime interests in the oil and gas sector. The CEO of the firm was part of a group of industry executives who recently refused to testify before a House Natural Resources Committee. Raul Grijalva, the chair of the committee, had called on the executives from the highest oil and gas producing firms in the US on land and water to testify in a probe related to surging energy prices. Grijalva has called on oil firms to answer regarding a rise in oil prices despite record profits.
On March 24, TD Securities analyst Menno Hulshof downgraded EOG Resources, Inc. stock to Hold from Buy but raised the price target to $140 from $130, saying the shares were now close to “fairly valued” and the premium justified in light of a record of operational excellence and asset quality of the firm.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Harris Associates is a leading shareholder in EOG Resources, Inc. with 9.8 million shares worth more than $872 million.
In its Q4 2021 investor letter, Artisan Partners highlighted a few stocks and EOG Resources, Inc. was one of them. Here is what the fund said:
“EOG Resources, Inc., a US shale-focused E&P firm, has been a beneficiary of higher energy prices. The business enjoys a low-cost production position and a strong balance sheet which enabled EOG Resources, Inc. to increase production capabilities during the downturn. As energy prices recover and the industry adjusts to the new supply and demand dynamics, investors have begun to appreciate the earnings power of the business. EOG’s management focuses on return on invested capital and cash flow generation, which distinguishes it from most of the company’s competitors. We believe EOG’s high-quality management team and access to low-cost reserves are sustainable competitive advantages in a commodity industry.”
3. Devon Energy Corporation (NYSE:DVN)
Number of Hedge Fund Holders: 51
Devon Energy Corporation is an independent energy firm. A stream of negative news in the past few weeks has had a negative overall effect on the shares of the firm. On March 14, the share price of the energy giant dropped over 10% in a single day after Jeffrey Ritenour, the CFO of the firm, sold 55,000 shares of the firm valued at around $3.2 million. A proposal to tax the profits of oil firms at a rate of 50% and a Congressional hearing on high prices were also among the news items that sent shares of the firm sliding.
On March 2, Devon Energy Corporation was among a host of energy stocks that were downgraded to Hold from Buy by investment advisory Benchmark. Analyst Subash Chandra issued the ratings update.
Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Devon Energy Corporation with 14.5 million shares worth more than $638 million.
In its Q4 2020 investor letter, GoodHaven Capital Management, an asset management firm, highlighted a few stocks and Devon Energy Corporation was one of them. Here is what the fund said:
“After a rough start to the year our two biggest energy holdings – WPX Energy rebounded materially in the last six months though energy was still our biggest detractor for the year. I’ve previously written about deciding earlier this year to direct new capital towards better businesses versus adding more to the energy sector, but given the material optionality at WPX, we opted to maintain a material exposure. Recently WPX announced an all stock merger with a larger competitor – Devon Energy – which will leave the new company with plenty of cash flow at lower oil prices, less leverage, and material upside to higher commodity prices.”
2. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 53
Chevron Corporation is an integrated energy and chemicals firm. On March 20, negotiations on a new labor contract stalled and workers of the firm went on strike in Richmond. The strike was also threatening other production facilities of Chevron Corporation but workers accepted an updated contract offer from the oil giant. The company has also raised its stake in an oil project in Myanmar despite promising to exit the country following violent protests against a coup last year.
On March 14, Morgan Stanley analyst Devin McDermott downgraded Chevron Corporation stock to Equal Weight from Overweight with a price target of $166, noting that the valuation of the firm was now beginning to “look expensive”.
At the end of the fourth quarter of 2021, 53 hedge funds in the database of Insider Monkey held stakes worth $6.5 billion in Chevron Corporation, up from 51 in the preceding quarter worth $4.4 billion.
In its Q3 2021 investor letter, Goehring & Rozencwajg Associates highlighted a few stocks and Chevron Corporation was one of them. Here is what the fund said:
“After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron Corporation announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.
What should Chevron Corporation expect?
It was recently reported by The Wall Street Journal that Exxon was considering abandoning two massive natural gas projects: the 75 trillion cubic foot (tcf ) Rovuma LNG project (capital cost $30 bn) and the 5 tcf Ca Voi Xanh offshore-Vietnam gas project (capital cost $10 bn). Exxon board members (most likely including the three supported by Engine No. 1) have publically expressed concerns about both projects. According to internal reports, these projects are among the highest CO2 producers in Exxon’s pipeline; it is no surprise these projects have been called into question. However, we find the plight of both fields to be perplexing since production would almost certainly be used to displace coal in electricity generation, cutting CO2 emissions by nearly 50%. This fact seems to be lost on the new Exxon board members.”
1. ConocoPhillips (NYSE:COP)
Number of Hedge Fund Holders: 56
ConocoPhillips is a Texas-based oil and gas firm. On March 24, news agency Reuters reported that the firm was planning to sell gas producing assets in the Anadarko Basin of north Texas and west Oklahoma. The sale would be made in around $300 million and the energy firm has begun paperwork to sell these to one bidder or several bidders together. The shares of the energy giant have more than doubled in the past twelve months as energy prices soared due to post-pandemic demand and a disruption in supplies from Russia.
On March 8, Bank of America analyst Doug Leggate downgraded ConocoPhillips stock to Neutral from Buy but raised the price target to $135 from $110, noting revisions in 2022 and 2023 EPS estimates up by about 28% and 24%.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in ConocoPhillips with 6 million shares worth more than $447 million.
In its Q1 2021 investor letter, ClearBridge Investments highlighted a few stocks and ConocoPhillips was one of them. Here is what the fund said:
“While reducing in health care and consumer staples, we increased our exposure to high-quality names in economically sensitive areas of the market. We added to low-cost, high-quality energy names (including) ConocoPhillips. We are positive on the company’s strong balance sheets, competitive positions and exposure to an economic recovery.”
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This article is originally published at Insider Monkey.
