Energy Stocks

Energy stocks are a big buy right now | OilPrice.com

Oil prices rose on Monday morning after OPEC+ decided to stay on course to cut oil production on Sunday introducing a $60 price cap on oil of Russian origin negotiated by the EU, G7 and Australia. OPEC+ previously agreed to cut output by two million bpd from November to the end of 2023, or about two percent of global demand.

Still, oil prices are down more than 30% from their 52-week highs, while surprisingly the energy sector is within just four percent of its highs. Indeed, during the last two months, the main measure of the energy sector, the so-called Energy Sector Select SPDR Fund (NYSEARCA: XLE ), rose 34%, while average spot oil prices fell 18%. This is a remarkable difference, as the correlation between the two over the past five years is 77% and 69% over the past decade.

According to Bespoke Investment Group via the Wall Street Journal, current distribution it’s the first time since 2006 that the oil and gas sector has traded within 3% of its 52-week high, while WTI has retreated more than 25% from its 52-week high. It is also only the fifth such divergence since 1990.

David Rosenberg, founder of an independent research firm Rosenberg Research & Associates Inc, outlined 5 key reasons why energy stocks remain a buy despite oil prices not making any significant gains over the past few months.

#1. Favorable valuations

Energy stocks remain cheap despite huge increases. Not only has the sector significantly outperformed the market, but companies in the sector remain relatively cheap, undervalued and come with above-average projected earnings growth.

Rosenberg analyzed the PE ratios of energy stocks by looking at historical data since 1990 and found that, on average, the sector is only in the 27th percentile historically. In contrast to, S&P 500 it is at its 71st percentile despite the deep selloff that occurred earlier in the year.

Image source: Zacks Investment Research

Some of the cheapest oil and gas stocks currently include Ovintiv Inc. (NYSE: OVV ) with a PE ratio of 6.09; City Resources, Inc. (NYSE: CIVI ) with a PE ratio of 4.87, Enerplus Corporation (NYSE: ERF ) (TSX: ERF ) has a PE ratio of 5.80, Occidental Petroleum Corporation (NYSE: OXY ) has a PE ratio of 7.09 while Canadian Natural Resources Limited (NYSE:CNQ) has a PE ratio of 6.79.

#2. Robust earnings

Strong earnings from energy companies are a big reason why investors continue to flock to oil stocks.

The third quarter earnings season is almost over, but so far it looks like it will be better than expected. According to FactSet Earnings Summaryfor Q3 2022, 94% of S&P 500 companies reported Q3 2022 earnings, of which 69% reported a positive EPS surprise and 71% reported a positive revenue surprise.

The energy sector showed the highest profit growth of all eleven sectors, namely 137.3% vs. 2.2% on average S&P 500. At the subsector level, all five subsectors in the sector posted year-over-year earnings growth: Oil & Gas Refining & Marketing (302%), Integrated Oil & Gas (138%), Oil & Gas Exploration & Production (107%), Oil & Gas Equipment and services (91%) and oil and gas storage and transportation (21%). Energy is also the sector in which most companies beat Wall Street estimates by 81%. Positive revenue surprises were reported by Marathon Petroleum ($47.2 billion vs. $35.8 billion), Exxon Mobil ($112.1 billion vs. $104.6 billion), Chevron ($66.6 billion vs. $57 .4 billion), Valero Energy ($42.3 billion vs. $40.1 billion) and Phillips 66 ($43.4 billion vs. $39.3 billion) contributed significantly to the increase in the index’s sales growth rate since 30. September.

Even better, the outlook for the energy sector remains optimistic. According to a recent Moody’s Research ReportIndustry profits will stabilize overall in 2023, albeit slightly below levels achieved at recent highs.

Analysts note that commodity prices have declined from very high levels earlier in 2022, but forecast that prices are likely to remain cyclically strong through 2023. This, combined with modest volume growth, will support strong cash flow generation for oil and gas producers. . Moody’s estimates that US energy sector EBITDA will reach $623 billion in 2022, but fall to $585 billion in 2023.

But analysts say low capital spending, growing uncertainty about future supply expansion and a high geopolitical risk premium will continue to support cyclically high oil prices. Meanwhile, strong export demand for US LNG will continue to support it high natural gas prices.

In other words, there are simply no better places for people investing in the US stock market to park their money if they are looking for serious earnings growth.. Moreover, the outlook for this sector remains optimistic.

While oil and gas prices have come down from recent highs, they are still much higher than they have been in the last couple of years, so there is still excitement in the energy markets. The energy sector remains a big favorite on Wall Street, with the Zacks Oils and Energy sector being the highest-rated sector of all 16 Zacks-rated sectors.

#3. Strong payouts to shareholders

Over the past two years, U.S. energy companies have shifted from using most of their cash flow to grow production to returning more cash to shareholders through dividends and buybacks.

As a result, the combined dividend and buyback yield for the energy sector is now close to 8%, which is high by historical standards. Rosenberg notes that similarly elevated levels occurred in 2020 and 2009, which preceded periods of strength. By comparison, the combined dividend and buyback yield for the S&P 500 is close to five percent, one of the largest gaps on record in favor of the energy sector.

#4. Low inventory

Despite sluggish demand, U.S. inventories are at their lowest level since the mid-2000s, even as the Biden administration seeks to lower prices by flooding markets with 180 million barrels of crude from the SPR. Rosenberg notes that other potential catalysts that could lead to further upward pressure on prices include a cap on Russian oil prices, further escalation of the war between Russia and Ukraine, and China’s departure from its zero-Covid-19 policy.

#5. Higher embedded “OPEC+ put”

Rosenberg says OPEC+ is now more comfortable with oil trading above $90 a barrel versus the $60-$70 range they have accepted in recent years. An energy expert says that’s because the cartel is less concerned about losing market share to US shale producers, who prioritize shareholder payouts over aggressive output growth.

OPEC+’s new stance offers greater visibility and predictability of oil prices, while prices in the $90-per-barrel range can sustain strong payouts through dividends and buybacks.

Alex Kimani for Oilprice.com

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