3 Energy Stocks Short Sellers Are Drilling Into: Is the Rally Running on Empty?

Stocks to sell

Investors are getting excited about the energy sector. The price of crude oil has topped $86 per barrel once again and is now at its highest level in months. Geopolitical uncertainty has played into the move. With the conflict in the Middle East and the ongoing problems with Russia, investors are pricing potential supply constraints into the oil market.

In addition, the economy continues to run hotter than expected and inflation remains above long-term targets. This inflation-driven economic backdrop should be supportive for energy prices.

It’s not just crude oil either. Investors are starting to price in the need for more electricity capacity, thanks to the surge in artificial intelligence applications. This has led to investor excitement in uranium stocks as the price of spot uranium soars.

But not everyone is convinced that the skies are clear for energy stocks. Short sellers are increasing their bets against the sector. In particular, they’re picking on these companies as having significant downsides.

These are three energy stocks short sellers are targeting for sizable losses later in 2024. All three have at least 5% of their outstanding shares floated, indicating that bears are betting heavily on significant decline in these energy stocks going forward.

Occidental Petroleum (OXY)

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Occidental Petroleum (NYSE:OXY) is one of the larger oil and gas companies out there with a market capitalization of more than $50 billion.

It is also a controversial one. The company levered up its balance sheet with the aggressive acquisition of Anadarko Petroleum just prior to the onset of the Covid-19 pandemic. Occidental turned to Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) to receive much-needed funding for that deal.

The company has its defenders — many people that follow Berkshire have taken a position in OXY stock. Bears, however, do not trust the company’s management team. They feel that Occidental has deployed capital poorly over the years.

Occidental is making another huge bet also, as it is investing a large portion of its capital into carbon capture. In theory, carbon capture is going to become a large market and Occidental could enjoy a considerable first mover advantage.

However, the economics are still largely unproven. If Occidental misfires here, it would be another blunder on top of the company’s already spotty track record. With the price of oil surging, many investors may prefer to buy energy companies that have stuck to their knitting rather than making a big bet on less proven carbon capture investments.

Cameco Corp. (CCJ)

Source: shutterstock.com/RHJPhtotoandilustration

Uranium stocks are sizzling right now. It’s been a huge turn of events for the long-beleaguered sector.

After the Fukushima disaster in Japan, it seemed that nuclear power was on the way out. There were significant shutdowns of nuclear power capacity in Japan and Germany, and it appeared many aging plants in the U.S. would be heading for their final moments as well. Now, though, some plants are seeing their lives extended and new plants are in the works.

With the increasing focus on green energy, nuclear is proving to be a valuable carbon-free power source. It can serve as a bridge fuel as well, helping decarbonize the economy while other renewable energy sources scale up.

Investors have started taking advantage of this trend as physical uranium demand is now outstripping supply — long story short, the price of uranium has soared.

That’s great for Cameco (NYSE:CCJ), which is one of the world’s largest uranium mining companies. CCJ shares have jumped about fourfold from the lows.

Bears think that traders are getting ahead of themselves. Cameco’s actual profitability remains quite limited — shares are trading at about 80 times trailing earnings. Analysts are modeling a large jump in earnings for 2024, even so CCJ stock trades at 48 times forward earnings. That’s rather pricy for an energy or mining firm. The stock also goes for four times book value and pays a mere 0.19% dividend yield — both figures screen poorly compared to most energy stocks.

Delek US (DK)

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Delek (NYSE:DK) is an independent refining company with a roughly $2 billion market capitalization. Delek is not the largest refining operation by any means, but it has enough scale to earn its keep in the industry.

Historically, refining was viewed as a low margin not very attractive industry. However, due to political and environmental obstacles, it has become almost impossible to build new refineries in North America. That, in turn, has made existing refining assets more valuable.

In addition, the fracking and shale boom has created much more domestic oil supply, such as from the Permian Basin. This creates cheaper feedstocks for American refining operations, including Delek. These domestic refiners have enjoyed a sharp jump in profitability in recent years.

The sector was disrupted by the pandemic and a drop in vehicle miles driven. But things came roaring back and valuations have rocketed. In the case of Delek, short sellers think the valuation has gotten much too steep with the stock jumping from a low of around $10 during the pandemic to more than $30 now.

Delek was barely profitable in 2023. Even setting aside last year as an aberration, analysts see Delek trading at nearly 108 times forward earnings. Bears would argue that this is far too high both for a refiner in isolation and also in comparison to a rival like Valero (NYSE:VLO), which is trading at about 7 times forward earnings. Short sellers think that DK stock has significant downside ahead as its valuation falls toward the median energy stock going forward.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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