ESG funds are quietly buying oil stocks to chase gains after their poor performance in the first half — here's the 1 big energy play they really like

ESG funds — portfolios that stress environmental, social, and governance factors — have grown in popularity in recent years. But you might be surprised at what these funds actually hold these days.

According to data from Bank of America, 6% of ESG funds in Europe now have investments in Shell — one of the oil and gas supermajors. A year ago, none of the funds owned the company.

“We believe [some] ESG funds are revisiting the cost of exclusion [of energy companies] given their underperformance in the first half of 2022 or waiting for regulations to be finalised amid greenwashing fears,” says Bank of America’s ESG strategist Menka Bajaj.

With strong oil prices, traditional energy stocks are firing on all cylinders. The Energy Select Sector SPDR Fund (XLE) is up 24% year to date. That’s in stark contrast with the S&P 500’s 17% decline over the same period.

In fact, Wall Street sees further upside in the sector. Here’s a look at three companies that analysts find particularly attractive.

Don’t miss

Shell (SHEL)

Let’s start with Shell — the company so attractive that even ESG funds couldn’t say no to.

Headquartered in London, Shell is a multinational energy giant with operations in more than 70 countries. It produces around 3.2 barrels of oil equivalent per day, has an interest in 10 refineries, and sold 64.2 million tons of liquefied natural gas last year.

It’s a staple for global investors, too. Shell is listed on the London Stock Exchange, Euronext Amsterdam, and the New York Stock Exchange.

Energy stocks have pulled back over the past month and Shell was caught in the sell-off as well. However, its NYSE-listed shares are still up 9.4% year to date.

Piper Sandler analyst Ryan Todd sees opportunity in the company. On Tuesday, the analyst reiterated an ‘overweight’ rating on Shell while raising his price target from $69 to $75.

Considering that Shell trades at around $49 per share today, Todd’s new price target implies a potential upside of 53%.

Chevron (CVX)

Chevron is another oil and gas supermajor that’s benefiting from the commodity boom.

For Q1, the company reported earnings of $6.3 billion, which more than quadrupled the $1.4 billion in the same period last year. Revenue totaled $54.4 billion for the quarter, up 70% year over year.

In January, Chevron’s board approved a 6% increase to the quarterly dividend rate to $1.42 per share. That gives the company an annual dividend yield of 3.9%.

The stock has enjoyed a nice rally too, climbing 22% in 2022.

HSBC analyst Gordon Gray expects the fun to continue. The analyst recently upgraded Chevron from ‘hold’ to ‘buy’ and set a price target of $167 — roughly 15% above where the stock sits today.

Exxon Mobil (XOM)

Commanding a market cap of nearly $370 billion, Exxon Mobil is bigger than Shell and Chevron.

The company also boasts the strongest stock price performance among the trio in 2022 — Exxon shares are up 38% year to date.

It’s not hard to see why investors like the stock: the oil-producing giant gushes profits and cash flow. In Q1, Exxon earned $5.5 billion in profits, a huge increase from the $2.7 billion in the year-ago period. Free cash flow totaled $10.8 billion for the quarter, compared to $6.9 billion in the same period last year.

Solid financials allow the company to return cash to investors. Exxon pays quarterly dividends of 88 cents per share, translating to an annual yield of 4.0%. Management has also increased the company’s share repurchase program to up to $30 billion through 2023.

Bank of America analyst Doug Leggate has a ‘buy’ rating on Exxon and a price target of $120. That implies a potential upside of 37% from the current levels.

ESG funds are quietly buying oil stocks to chase gains after their poor performance in the first half — here’s the 1 big energy play they really like

Don’t miss

Shell (SHEL)

Chevron (CVX)

Exxon Mobil (XOM)

What to read next