2 energy stocks with exciting potential and 1 we avoid

Energy businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the energy industry and the broader economy. The market seems to be debating where we are in the cycle as the energy stocks were flat over the past six months. At the same time, the S&P 500 rose by 6.8%.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Taking that into account, here are two energy stocks we think can generate sustainable market-beating returns and one we're passing on.

Pioneering a way to monetize stranded gas reserves that would otherwise be uneconomical to develop, Golar LNG (NASDAQ:GLNG) converts ships into floating liquefied natural gas facilities that liquefy natural gas at offshore sites.

Annual revenue growth of 2.8% over the last five years was below our standards for the energy upstream and integrated energy sector

Cash-burning history makes us doubt the long-term viability of its business model

Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $45.82 per share, Golar LNG trades at 133.3x forward P/E. Read our free research report to see why you should think twice about including GLNG in your portfolio, it's free.

Operating some of California's most productive oil fields including Elk Hills and Belridge, California Resources (NYSE:CRC) explores for and produces crude oil, natural gas, and natural gas liquids from fields across California.

Market share has increased this cycle as its 7.1% annual revenue growth over the last ten years was exceptional

Excellent production efficiency results in a top-tier gross margin of 56.1%

Strong free cash flow margin of 13.2% enables it to reinvest or return capital consistently

California Resources is trading at $54.53 per share, or 14.3x forward P/E. Is now a good time to buy? Find out in our full research report, it's free.

Operating across three key regions with over 328,000 net acres under its control, SM Energy (NYSE:SM) explores for, develops, and produces oil, natural gas, and natural gas liquids primarily from shale formations in Texas and Utah.

Market share has increased this cycle as its 16.7% annual revenue growth over the last ten years was exceptional

Highly-profitable operating model results in strong unit economics and a best-in-class gross margin of 86.8%

SM is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders

SM Energy's stock price of $40.48 implies a valuation ratio of 4.5x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it's free.

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