Energy stocks have been undergoing a major transformation in the past year and a half, driven by a tripartite cohort of the challenges in the energy sector. This includes elevated commodities prices, geopolitical tensions and the climate crisis. The first two go hand-in-hand. The war in Ukraine has revitalized decades-old geopolitical rivalries while lifting global energy and food prices. The climate crisis has accelerated the need for a transition to low-carbon energy sources, as countries have pledged to achieve net-zero emissions by mid-century under the Paris Agreement.
These secular trends have created both opportunities and risks for energy companies, depending on their business models, strategies and capabilities. Some companies have been able to adapt to the changing environment and benefit from the recovery in energy demand and the growth in renewable energy markets. Others have struggled to perform well. That does not mean, however, these companies cannot turn around. If they do happen to beat expectations, these companies could trigger a massive short squeeze in the energy stocks, an event when short sellers begin to make losses on their positions as share prices rise.
Crescent Energy Co. (CRGY)
Crescent Energy Co. (NYSE:CRGY) is an independent oil and gas company that operates in the Permian Basin, the Eagle Ford Shale and the Gulf of Mexico. The company has a market capitalization of over $2.2 billion and a dividend yield of 3.52%. However, the company also has a high short interest of 8.6%, which indicates that a number of investors are betting against its future prospects.
One of the main reasons for the bearish sentiment is most likely due to the company’s high debt load relative to its weak cash flow generation. As of Q2 2023, Crescent Energy had a total debt of $1.3 billion, and cash and cash equivalents only amounted to $2.2 million. Sure, it is normal for oil and gas companies to maintain capital intensive businesses and thus use a sizable amount of cash. Still, Crescent Energy’s cash held on the balance sheet has never been significant and, in 2022, the oil company held zero dollars in cash.
Still, Crescent Energy’s outlook for the rest of 2023 could be surprising. Oil prices have been declining since last year but in the past quarter they have been on the rise. High demand from China and supply cuts from Saudi Arabia could put upward pressure on global oil prices, potentially benefiting companies like Crescent Energy. If the company beats expectations, short sellers could find themselves in a bind.
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Aemetis (NASDAQ:AMTX) is a renewable fuel and biochemicals company that produces ethanol, biodiesel, renewable natural gas and bioplastics. Despite being in a novel sector, the company also has a high short interest of 10.0%, implying investors could be skeptical about its growth potential.
What has hurt Aemetis recently is its inability to beat earnings expectations. For the past three quarters, the company has missed both sales and earnings per share estimates. Another reason for the investor distrust is the company’s lack of scale and diversification. The company has only one ethanol plant in California, which has a capacity of 60 million gallons per year, and one biodiesel plant in India, which has a capacity of 50 million gallons per year. The company’s renewable natural gas and bioplastics projects are still in development stages and have not generated any significant revenue yet. Furthermore, ethanol sales from the California plant contributed to 89% of revenue in 2022.
The company’s outlook for the rest of 2023 could be promising. Earlier in the year, Aemetis temporarily closed down its California ethanol plant to thwart high natural gas prices. Thus, for the first half of 2023, revenues were skewed toward Aemetis’ biodiesel business.
As the plant reopens and Aemetis ethanol revenue growth regains steam, the company could be benefitting from both high ethanol and biodiesel sales. Overall, these events could trigger a short squeeze.
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Transocean (NYSE:RIG) is a leading offshore drilling contractor that provides rigs, equipment and services for oil and gas exploration and production. One of the main reasons for general caution in the company’s shares is its exposure to the cyclical and volatile offshore drilling market, which has been hit hard by the sluggish growth in oil prices in 2023. Even when commodities prices were elevated in 2022, Transocean failed to capture that price momentum. The company only tepidly grew revenues by 0.7% in 2022.
Similar to the entries above, another reason why investors should be worried is the company’s heavy debt burden and weak liquidity position. The company has a total debt of $7.8 billion, which is more than three times its last twelve months (LTM) revenue of $2.7 billion. This has resulted in significant interest payments over the past few years. As an example, interest payments were $561 million or 22% of revenues in 2022. The company’s interest expense was $417 million in the first half of 2023 on track to surpass last year’s interest payments sum.
Despite what short sellers are thinking, Transocean shares have performed well this year. If oil prices continue their rise in the second half of the year, Transocean could stand to benefit and deliver outstanding financial performance, putting short sellers in an even tougher spot.
On the date of publication, Tyrik Torres 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.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.