Energy stocks have risen significantly this year, driven by strong oil prices. The S&P Energy Select Sector Index is up nearly 33% year to date compared to the broader index's nearly 6% rise. However, some energy stocks have risen far more than their sector peers. Here are three such stocks that have already more than doubled this year. Let's see if they can continue generating such returns for the rest of the year and beyond.
SM Energy
SM Energy (SM 0.37%) is a small, independent oil and gas producer with a market capitalization of $1.9 billion. At the end of 2020, the company had 405 million barrels of oil equivalent in proved reserves. SM Energy's production in 2020 averaged 127,000 oil-equivalent barrels per day.
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The company's stock has risen 194% so far in 2021 and is up 1,410% in the past year due to the rise in oil prices. As an independent oil and gas producer, the company's earnings are directly tied to oil prices. Yet, with the recent rise, SM Energy stock has recovered only some of its previous losses and the stock is still around 46% off its 3-year high price.
With beginnings dating back more than 100 years, SM Energy stock's rise isn't only about hype or momentum. Along with stronger oil prices, SM Energy's outperformance can be attributed to two key factors -- the company's cash generation and leverage reduction. In 2020, SM Energy generated $791 million in operational cash, compared to $823 million in 2019. It also generated $240 million in free cash flow. SM Energy targets positive free cash flow in 2021.
SM Cash from Operations (Annual) data by YCharts
The company also reduced its long-term debt by $500 million in 2020. In April last year, SM Energy cut its semiannual dividend payment by 80% to $0.01 per share to conserve cash. That looks like a step in the right direction. Finally, the company's premium assets in the Austin Chalk play in South Texas have generated competitive returns -- one of the top reasons behind analysts' upbeat outlook on the company.
SM Energy looks like a well-managed company. Still, it can do little when oil prices tumble. In short, SM Energy stock is a levered bet on oil prices and thus is inherently volatile. So, there is no certainty whatsoever that it can replicate its recent performance in the future.
Callon Petroleum
Callon Petroleum (CPE) stock is up 191% so far in 2021. Like SM Energy, Callon Petroleum is a small, independent oil and gas producer with a market capitalization of roughly $1.7 billion.
CPE Cash from Operations (Annual) data by YCharts
In 2019, Callon acquired Carrizo Oil & Gas, along with its debt, which resulted in a significant increase in the company's debt level. Callon mentions reducing debt as one of its top priorities and the company has been actively working on it. The company's high-quality Permian assets generate higher returns due to their low breakeven points. Additionally, Callon has significantly improved capital efficiency by reducing its well drilling and completion costs.
Callon Petroleum, which was on the brink of bankruptcy, has gotten some support from rising oil prices. High short interest in the stock further boosted the price as investors bought shares to cover their short positions recently.
CPE Short Interest data by YCharts
With shares shorted as a percentage of outstanding shares having gone down significantly, this factor may not support stock price much in the near term. In the long term, though, the stock remains subject to the vagaries of oil prices. With its high debt load, Callon looks like a very risky bet on oil prices.
Aemetis
Founded in 2006, Aemetis (AMTX -1.75%) is a small producer of renewable fuels. It has an ethanol production facility in California and a biodiesel facility in India. In its 15 years of operation, Aemetis' financial performance has been awful.
AMTX Revenue (Annual) data by YCharts
It has incurred losses every year in its operational history with the exception of 2015. Likewise, the company has largely been burning cash throughout.
The company regularly borrows funds or issues shares to meet its operating capital needs. What's more, out of an outstanding debt of around $230 million, nearly $161 million is owed to a single lender called Third Eye. Aemetis is required to remit substantially all excess cash from operations to this lender. Indeed, the company's ability to continue its operations largely depends on this single lender.
Roughly 83% of Aemetis' North America revenue in 2020 came from just two customers. The company's North America segment accounts for nearly 90% of its total revenue. Likewise, just two customers accounted for around 68% of its India segment's revenue in 2020.
Aemetis stock skyrocketed recently after the management presented grand plans to grow its revenue and profits. However, looking at the company's past performance, the targets look too lofty. Meanwhile, utilizing the opportunity, Aemetis has issued more than 5 million shares under its at-the-market program that commenced in October 2020, with nearly 4 million issued in 2021.
All in all, Aemetis stock faces significant risks and its rise isn't supported by fundamentals. Considering the above red flags, it's best to steer clear of this stock until there is a significant improvement in its underlying operational performance.
