3 Risky Energy Stocks To Avoid at All Costs

Investors have so many options when considering the energy sector, but in this video clip of "The High Energy Show" on Motley Fool Live, recorded on March 15, Fool.com contributors Jason Hall, Travis Hoium, and Matt DiLallo discuss three stocks to definitely keep out of your portfolio. 

Jason Hall: I think a lot of investors are looking at renewables. They are looking at some pretty marginal companies as a result. I think some are also looking at some of those marginal companies that their stocks are well down right over the past year but are still trading for.

Travis Hoium: Crazy multiples.

Hall: Crazy multiples, particularly considering the quality of the business. I want to talk about Plug Power (PLUG 4.02%). This is an interesting company and I think they have made some progress and they are working on some really interesting technology and the hydrogen business. This is fuel cells. They are working on the technology to not just get the energy out of hydrogen, but also make hydrogen. Moving it back and forth both ways to store the energy and also extract the energy from hydrogen.

But the stock trades for about 22 times sales they've yet to really in a large-scale way like our large commercial scale way, demonstrate what they're trying to do is as good as they say. The biggest thing to me is that this company has been around for a very long time. It's more than 20 years old. They have a long history of giving a great story and raising capital. Then just absolutely eviscerating that capital. Let's see. They're long-term.

Hoium: Yeah if you get the chart of their outstanding shares. It's crazy.

Hall: Well I'm just going to show the ROIC, return on invested capital. The entire company's existence is negative 10%, right? That's before we even talk about shares outstanding. This is what they do. They tell the story. They raise capital. That keeps everybody's salaries coming in and the lights on and their computers to write those great presentations until they run out of capital and do it again.

There has been some growth along the way. It's not like they haven't done anything, but the thing that they've done the best is tell a great story and then at the cost of more investor capital. I think just tons of risks still there. As much as I think hydrogen is going to be a part of this Travis to me it's just this is one of the companies to avoid.

Hoium: Their major market right now is hydrogen for forklifts. If you want to talk about really what their business is today.

Hall: That's their business today.

Hoium: That's their business today. Keep that in mind. Matt, what stock did you have for your risk pick?

Matthew DiLallo: I think refiners can be a little bit of a near-term risk with oil $100 plus. Because whereas oil companies make money as oil is over $100 refiners have to buy that oil over $100. You've got that input cost risk and then demand instructions possible. I know. I can't tell you how many people I've talked to that are talking about gas prices and what price would you slow down your driving.

I think there's some of that risk and then as compared to the other refiners, Valero (VLO 0.99%) doesn't have the midstream business like Phillips 66 (PSX 1.14%), got a good midstream business. What they do have is ethanol, which I think is going to face some more pressure because corn prices are going up and fertilizer prices are going up. Their two main businesses are both facing headwinds and so I'd be a little bit concerned with Valero these days.

Hoium: The stock that I wanted to talk about is ExxonMobil (XOM 0.39%). This is really more of a macro oil play. If you look at their chart over the last decade, you can see that for a long period of time there they were actually paying out more in dividends than they were generating cash. That's why you see their debt going up over time. Now that's changed over the last two years.

I want to be really clear that over the next 1-5 years it is very possible that this company makes a ton of cash. But I think that the long-term future is going to be really murky for a company like this. This is clearly a bet on the future of oil and natural gas. That's just not an area where I think the long-term trends are going to be in our favor. I think there's a lot more risks than investors really think here.

The stock is actually underperformed the market by a pretty wide margin over the last decade or so. It's a lot of the things that we've talked about today. The future is more renewables and more electric vehicles that doesn't mean that we're not going to have plenty of demand for oil and natural gas.

But we saw this in coal 10 years ago. Ten years ago if you said hey every major coal company is going to go bankrupt in the next 10 years people would've said you were nuts. But that was basically what happened. There's not a lot of the big coal producers left.

Hall: There was this tsunami that was out at sea that was coming in that was evident it was coming and the market ignored it until it happened. Then it was just massive value destruction.

Hoium: I think that we're going to see something similar in oil and natural gas. It's going to take a lot longer than coal. But I don't want to be in front of that tsunami. I guess.

Hall: You don't want to be the last buyer of ExxonMobil.

Hoium: I don't want to be the last buyer of ExxonMobil. This is a company I watched just as a bellwether for the industry because it's going to tell us a lot about when they pull back on their capital spending given oil prices are high that should tell you what's going on in the oil industry. This is becoming a cash flow business not a growth business because these companies see the future.