Topline
During the stock market’s worst year since 2008, energy stocks have greatly outperformed other assets, providing strong returns as investors piled into the sector amid political and economic turmoil.
It’s been a banner year for energy stocks like Chevron.
Key Facts
The S&P 500 Energy index, composed of the energy companies listed on the closely-followed index, has provided a 61.3% return this year including dividends.
That’s by far the best performance of any of the S&P’s 11 sectors, with the utilities and consumer staples indexes the second and third-strongest performers at comparatively meager 3.1% and 0.2% total returns, while the nine other sectors are in the red, with the communication services sector bringing up the rear with a 42% loss this year.
Spurred by a global spike in commodity prices following Russia’s invasion of Ukraine, energy companies’ “continued commitment [to] capital discipline has resulted in a strong focus towards [free cash flow] generation which companies allocated towards shareholders returns (via dividends and buybacks) and debt reduction,” Goldman Sachs analysts led by Neil Mehta wrote in a Wednesday note to clients.
And experts expect the energy sector to continue to ride its success into next year, with Wells Fargo analyst Ian Mikkelsen writing in a recent note he sees a “favorable environment for Energy going into 2023 given it…has historically performed well during periods of broad inflation,” while Bank of America forecasted a $100 average price per barrel for international benchmark Brent Crude in 2023, roughly 20% higher than it now stands.
Surprising Fact
The best-performing stocks year-to-date on both the S&P and the Dow Jones Industrial Average are both energy companies, with Chevron’s 50% gain pacing the Dow and billionaire investor Warren Buffet’s favorite Occidental Petroleum’s 101% rally leading the S&P.
Crucial Quote
“Energy stocks are very, very cheap at what they’re currently earning,” Hunter Noble, portfolio manager of Hotchkis & Wiley’ Mid-Cap Value Fund, told Forbes earlier this month, citing energy companies’ leadership’s restraint to not “utilize all the cash flow to go out and develop additional resources.”
Key Background
Russia, one of the world’s largest oil producers, invaded Ukraine in February, sending energy prices soaring globally and subsequently contributing to high inflation. Oil companies raked in record profits earlier this year thanks to high market prices but proved resilient as prices slid from their spring highs with investors’ confidence in the firms’ strong bottom lines.
Further Reading
These Were the Best Trades in 2022 (Bloomberg)
If Energy Stocks Are Undervalued, Is Now The Time To Buy? (Forbes)
Source: https://www.forbes.com/sites/dereksaul/2022/12/29/energy-stocks-outshone-peers-in-2022/