If you are reading this, I know that you are interested in the energy sector, and therefore you are aware that 2022 was an outstanding year for energy stocks. The sector ETF, XLE, delivered a total return of over 64%, which is impressive enough on its own, but when put in the context of a year when the broad equity benchmark, the S&P 500, lost 18.1% is truly remarkable. As I have said here before that has resulted in some serious schadenfreude for those of us who remained loyal to energy during years of underperformance, and particularly for pundits like me who were mocked for saying that oil wasn't dead and that would be resurgent at some point.
As sweet as the taste of revenge is, though, it is the results in our portfolios that matter. So, now that we have established that we are smarter than the average bear, how can we keep the run of positive results going in 2023?
If you read what I wrote at the end of last year, you will know that I am not particularly bullish on oil over the year. In fact, I have already said that I expect crude to finish they year lower than it starts it. What we found out at the end of last year, though, was that after such woeful underperformance for so long, energy stocks can post big gains without crude moving higher. That can easily be seen when you look at a 6-Month chart for two ETFs, XLE, which tracks energy stocks, and USO, which tracks crude futures prices.
During that time USO fell 12%, while XLE gained 27%. There…
If you are reading this, I know that you are interested in the energy sector, and therefore you are aware that 2022 was an outstanding year for energy stocks. The sector ETF, XLE, delivered a total return of over 64%, which is impressive enough on its own, but when put in the context of a year when the broad equity benchmark, the S&P 500, lost 18.1% is truly remarkable. As I have said here before that has resulted in some serious schadenfreude for those of us who remained loyal to energy during years of underperformance, and particularly for pundits like me who were mocked for saying that oil wasn't dead and that would be resurgent at some point.
As sweet as the taste of revenge is, though, it is the results in our portfolios that matter. So, now that we have established that we are smarter than the average bear, how can we keep the run of positive results going in 2023?
If you read what I wrote at the end of last year, you will know that I am not particularly bullish on oil over the year. In fact, I have already said that I expect crude to finish they year lower than it starts it. What we found out at the end of last year, though, was that after such woeful underperformance for so long, energy stocks can post big gains without crude moving higher. That can easily be seen when you look at a 6-Month chart for two ETFs, XLE, which tracks energy stocks, and USO, which tracks crude futures prices.
During that time USO fell 12%, while XLE gained 27%. There is, therefore, no reason that some energy stocks can't outperform the market, even if oil does trade lower. So, what should investors be looking at in the sector?
Exxon Mobil (XOM): Among big oil stocks, XOM still has the most potential, despite nearly doubling its price last year, because that performance came not just because energy stocks in general did well, but also because of internal, company-specific factors.
Exxon was an underachiever even in the down years for energy but benefited from a turnaround that started early in 2022. They refocused on making money rather than trying to be "innovative", and it shows. However, turning around the fortunes of such a massive company takes time, and it is unlikely that we have seen the end of their relative outperformance.
Rivian (RIVN): I guess EV maker Rivian isn't really an energy stock, but investors should definitely have something in their portfolio that `reflects the continuing shift towards EVs, and Tesla (TSLA), the prime candidate for that role in the past, is undergoing a serious revaluation. Elon Musk's Twitter adventure may or may not actually be a distraction, but the market believes it is and the longer that stays in the headlines, the further TSLA is likely to fall.
I wouldn't bet against Musk turning the stock's fortunes around necessarily, but there are better bets in the EV space right now, including Rivian. Their biggest problems this year have been supply chain related. Production has fallen short of targets, but there is still demand for their vehicles so, on the reasonable assumption that they will improve their supply chain in 2023, the stock could see a significant pop.
I will say that RIVN will need to be closely watched as further hiccups in supply would cause further losses, but with China reopening, it is worth the risk.
Schlumberger (SLB): Another stock that outperformed the rest of the outperforming energy sector last year, but where momentum can be expected to be continued well into this year.
The trailing and forward P/Es of the stocks, at around 26 and 19, respectively, may suggest that all the value is gone in SLB, but that ignores one important thing. Oil industry capex, on which they are reliant as an oilfield services company, was in the doldrums for much of last year, but plans to develop fields and expand output began to pick up in the second half of the year. The stock bounced on that, but the real benefits are yet to be seen, and a PEG ratio of 0.78 indicates that they are nowhere near priced in at this point.
These three stocks, taken together give a mix of exposure and risk level that makes sense. If, as expected, the sector continues to show gains in 2023, a portfolio with them forming the core can once again vindicate ones belief in energy as an investment.
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