Excelerate Energy currently trades at $33.29 per share and has shown little upside over the past six months, posting a small loss of 0.6%. The stock also fell short of the S&P 500’s 7.5% gain during that period.
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Why is Excelerate Energy not exciting?
We’re cautious about Excelerate Energy. Here are three reasons we avoid EE, plus one stock we’d rather own.
1. Fewer distribution channels limit its ceiling
In Energy, scale separates fragile single-asset producers from platform-style businesses that generate revenue across entire basins and infrastructure networks.
Excelerate Energy’s $1.47 billion of revenue in the last year is pretty small for the industry, suggesting the company is a subscale business in an industry where scale matters.
2. Low gross margin reveals weak structural profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Excelerate Energy, which averaged 29.9% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Mediocre free cash flow margin limits reinvestment potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Excelerate Energy has shown mediocre cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 5.5%, below what we’d expect for an upstream and integrated energy business.
Final judgment
Excelerate Energy’s business quality ultimately falls short of our standards. With its shares lagging the market recently, the stock trades at 16.6× forward P/E (or $33.29 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
