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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Income Investors Are Returning To Oil And Gas Stocks

  • Record cash flows and profits of the past two quarters have prompted many oil and gas firms to boost dividends or pay special variable dividends.
  • Some investors have started to see oil and gas stocks as income investment stocks rather than boom-and-bust cyclical stocks.
  • Right now, oil stocks are looking attractive by some metrics.

Some investors have started to see oil and gas stocks as income investment stocks rather than boom-and-bust cyclical stocks, as many others still believe. Record cash flows and profits of the past two quarters have prompted many oil and gas firms to boost dividends or pay special variable dividends, as is the case with U.S. shale producers. Many more expanded and increased their share buyback programs. The record profits and the cash flow bonanza could lay the foundations for more stable dividend payouts to shareholders, some investors believe. But others continue to see the industry as a cyclical business that slashes dividends when oil prices plunge.

The question for all investors going forward will be whether the industry will continue to keep disciplined spending and use more of its cash flows to reward shareholders. Oil firms have pledged this much over the past two quarters, looking to attract investors and pay current shareholders who have stuck with their stocks through thick and thin over the past few years. But what will oil companies do during the next bust? Will they be able to keep the current policy of rewarding shareholders more? Or will they resort – once again – to slashing or suspending dividends, as they did in the two major oil price busts of the past decade? 

“The industry has seen a permanent transition to almost a high-yield, income space,” Morningstar analyst David Meats told Bloomberg while noting that the almost income-investment profile of oil stocks is unlikely to persist. The current high dividend yields could be seen as a risk premium for investors for the cyclical nature of the stocks, Meats said. Related: OPEC+ Output Cut Looks Increasingly Likely As Producers Narrow Down Options

Right now, oil stocks are looking attractive by some metrics. Analysts say that energy stocks are much cheaper than other sectors based on forward-year price-to-earnings (P/E) ratios.

Year to date, the energy sector has been the top-performing sector in the S&P 500 index, according to market data compiled by Yardeni Research.  

The energy sector in the S&P 500 had gained 31.9% year to date to September 29. In comparison, S&P 500 is down 23.6%, and all other sectors have also lost ground since January. 

Equity strategists, portfolio managers, and retail investors have grown increasingly bullish on energy stocks, the latest Bloomberg MLIV Pulse survey carried out in early September shows. 

The poll of 814 respondents—including retail and portfolio investors, risk managers, buy-side and sell-side traders, equity strategists, and economists—showed that two-thirds of all respondents intended to increase their exposure to energy-related stocks and bonds over the next six months. 

Moreover, nearly half—or 44%—of respondents say the current price of oil doesn’t adequately reflect actual supply and demand.

Stocks could remain attractive in the medium term, too, some analysts say. 

“With the average company approaching “debt free” status by early 2023 their ability to increase shareholder returns in the form of dividends and buybacks may be much greater,” Eric Nuttall, Senior Portfolio Manager at Ninepoint Partners, said this week.

“Even with the rally earlier this year, energy stocks remained inexpensive and failed to even moderately embed an oil price above $100,” Nuttall added.

Stacey Morris, head of energy research at VettaFi, commented in mid-September on the observation that “energy stocks and oil happily decouple.”  

“Oil prices typically dictate the direction of energy stocks, but thankfully for energy investors, that has not been the case over the last several weeks. Oil prices have seen three straight months of price declines and are down more than 30% from their relative high in June, but one may not realize that by looking at energy stock performance,” Morris said.


And she asked the million-dollar question: “Are investors finally looking past the volatility in oil prices to the actual merits of energy companies and the way they are returning cash to investors?”

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • George Doolittle on October 01 2022 said:
    Investing in the US energy complex is in point of fact a very aggressive *GROWTH* strategy not a value play.

    If you thought being long Redfin was deadly wait until the numbers for offshore oil drillers not named $slb Slumberger come to play! Berkshire Hathaway having such massive positions in both $oxy Occidental and worse still Apple is quite the sight to behold at the moment....plus owning outright a private Railroad Transcontinental in the USA and imagine if that strike in the USA Railroad Industry had been effected!

    Definitely not long bought and paid for by George Soros toady Florida Governor Ron DeSantis at the moment as there is no way he's going to become the Republican nominee for President of the United States in 2024 given how *"Floridian Only Club"* he has turned out to be in his First Crisis. And this was actually not a bad Hurricane by Florida standards.

    Anyhow not that current President definitely One Term Joe Biden is any better talking up about getting wedding rings back from this. Long Derek Jeter strong buy. A guy who knows when to *SELL* too would be an understatement!
  • Mamdouh Salameh on October 02 2022 said:
    There are many very valid reasons why seasoned investors will always flock to oil and gas stocks.

    1- The global economy will continue to be driven by oil and gas throughout the 21st century and probably far beyond.

    2- The global oil industry is the most lucrative in the world as evidenced by the energy sector in the S&P 500 gaining 31.9% year to date to September 29 compared with a 23.6% loss for all other sectors of the S& P 500 since January.

    3- Global demand for oil and gas will continue to be robust well into the future underpinned by a world population projected to rise from 7.9 billion currently to 9.7 billion by 2050 and a global economy also projected to grow from $91 trillion now to $245 trillion by 2050. Therefore oil and gas prices could be expected to keep rising well into the future.

    4- Environmental activists and proponents of doom and gloom have their own political agenda. They tend to twist realities and fact to suit their political leanings. Therefore, investors shouldn’t let themselves be influenced by their claims.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment

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