Some investors are turning bullish on energy stocks, despite their disappointing performance this year and some tremendous challenges facing Big Oil.
Out of the S&P 500's 11 sectors, analysts are the most optimistic about the energy industry, with the sector earning roughly 60% of buy ratings, according to FactSet.
But energy stocks have fallen 7.8% this year, compared to a gain of 14.5% for the S&P 500. It's the second-worst-performing sector this year. Shares of Chevron have slipped about 13% this year, Halliburton dropped 15.7%, Marathon Oil slipped 15.3% and Pioneer Natural Resource declined 9.8%.
Why are energy stocks down? The energy sector rose about 59% last year after Russia's invasion of Ukraine sent commodity prices skyrocketing. But in 2023, recession in Europe, concerns about a potential US recession as well as huge challenges facing China's economy have kept pressure on energy stocks, as investors fear lackluster demand for oil.
The International Energy Agency earlier this month predicted that energy demand will barely grow throughout the decade, before peaking in 2028.
"It seems like everything is just in a holding pattern for this recession, yes-or-no question to be answered," said Jay Rhame, chief executive officer of Reaves Asset Management.
West Texas Intermediate crude futures, the US benchmark, stand just below $70 a barrel. Brent crude futures, the international benchmark, are holding at roughly $74 a barrel — even as OPEC+ continues to promise production cuts.
Russian supply has held up despite Western sanctions, as the country ramped up exports to China and India.
Shifting trends on Wall Street have also been a downer on oil prices. Many energy stocks are dividend-paying stocks, which have performed poorly this year as investors — betting that the Federal Reserve is nearing the end of its rate-hiking cycle turned to growth names like Apple and Nvidia instead. The S&P 500 High Dividend Index has fallen 7.7% this year.
Why are some investors bullish? There are two main reasons why investors are keen on energy stocks: They're priced attractively, and the companies are making money.
The S&P 500's energy sector currently trades at about 10.5 times its expected earnings, below its 10-year average of about 18.9, according to FactSet.
Energy companies have also managed to stay profitable even as oil and gas prices have fallen. ExxonMobil, the US's largest oil company, earlier this year reported first-quarter earnings of $11.6 billion excluding special items — more than double the $5.5 billion it earned the first quarter of last year.
Chevron reported first-quarter earnings, excluding special items, of $6.7 billion. That's slightly above the $6.5 billion it earned on that basis for the same period last year.
"If you're a believer of buy low, sell high, the fundamentals are still pretty strong and the stocks are very cheap," said Eric Diton, managing director of the Wealth Alliance.
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