After a stellar run fueled by multi-decade-high commodity prices in 2022, the energy sector has become a laggard in 2023 as investors turn their attention to growth stocks in sectors like tech, software and IT.
With a year-to-date return of -3.8%, the energy sector is the worst performing of all 11 U.S. market sectors with the broad-based market benchmark S&P 500 having returned +8.6% over the timeframe. Energy stocks have been weighed down by weak oil and gas demand, oversupply, economic uncertainty, interest rate hikes and a stronger dollar
Thankfully, the outlook for the sector is expected to improve as the quarters roll on.
According to commodity analysts at Standard Chartered, the oil surplus that started building in the markets last year will be gone towards the end of 2023 thanks to OPEC+ production cuts, and that should goose oil prices. Meanwhile, natural gas prices are expected to improve around the same time as Europe starts scrambling for supplies ahead of the next winter season.
#1. ExxonMobil Corp.
Market Cap: $37.2B
YTD Returns: 8.73%
Shares of ExxonMobil Corp. (NYSE:XOM) have been sliding in Tuesday's session after the company caught a Wall Street downgrade mainly on valuation concerns. Goldman Sachs has lowered its XOM rating to Neutral from Outperform, noting that the shares have returned a juicy 175% ever since the bank upgraded them to Buy in late 2020. In comparison, shares of Exxon’s closest peer, Chevron Corp. (NYSE:CVX) have advanced 89% while the S&P 500 has gained 13% over the timeframe.
Still, GS notes that Exxon is not short of useful tailwinds including a sharp reduction in costs; investments in attractive long-term projects such as Guyana; changes in leadership and board representation and greater confidence in the sustainability of the dividend and ongoing share repurchases.
"That said, the valuation of Exxon Mobil now appears to better reflect the structural turnaround in the business, with shares trading at a 7% free cash flow yield on 2024 estimates at $85/bbl Brent," Goldman analyst Neil Mehta wrote.
Mehta says XOM appears less compelling when there are cheaper investment alternatives among big oil producers such as ConocoPhillips (NYSE:COP), Occidental Petroleum (NYSE:OXY), Canadian Natural Resources (NYSE:CNQ) and Marathon Petroleum (NYSE:MPC).
#2. Cheniere Energy Inc.
Market Cap: $37.3B
YTD Returns: 5.1% While Cheniere Energy (NYSE:LNG) is up just over 5% in the year-to-date, it’s also shed nearly 17.3% over the past six months as natural gas prices take investors for a ride. But the long-term picture suggests upside for the Houston-based energy company focused primarily on LNG production, shipping and marketing.
As one of the leading LNG exporters in the world, Cheniere is on solid ground long-term. However, the near-term concern is that the European Union’s natural gas storage units are still relatively full after a mild winter. Some (including Cheniere) are worried that we could see some LNG cargo cancellations this summer as a result. Shortly after that, though, we will see another drive to fill storage ahead of the next winter season.
Cheniere has just announced Q1 2023 earnings whereby revenue of $7.3B (-2.4% Y/Y) beat by $1.77B while EPS of $22.10 was way better than the consensus of $6.64. The company has raised its full-year guidance and expects consolidated adjusted EBITDA to clock in at $8.2 - $8.7 billion and full year 2023 Distributable Cash Flow to come in at $ 5.7 - $6.2 billion.
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#3. Enphase Energy Inc.
Market Cap:
YTD Returns: -39.0%
Enphase Energy Inc. (NASDAQ:ENPH) is a controversial pick on this list considering its ongoing selloff but we have included it here due to its turnaround potential. Last week, the company delivered a healthy quarterly report but issued weak guidance sparking fears of industrywide weakness. ENPH shares crashed 25.7% on Wednesday to a 10-month low after the company cut its Q2 revenue guidance, blaming it on weakness in its pivotal U.S. market and higher interest rates.
ENPH took down its U.S.-based peers along with it: First Solar (NASDAQ:FSLR)-5.2%, Sunrun (NASDAQ:RUN)-9.6%, NextEra Energy (NYSE:NEE)-4.0% while SunPower (NASDAQ:SPWR) lost 9.7%. Interestingly, shares of Chinese solar companies were left unscathed: JinkoSolar Holdings and Daqo New Energy (NYSE:DQ) were flat on the day before rallying on Thursday presumably as new money flowed their way from their U.S. rivals.
Enphase reported Q1 2023 revenue of $726.02M (+64.5% Y/Y), beating the Wall Street consensus by $5.51M while Q1 Non-GAAP EPS of $1.37 (+170% Y/Y) beat by $0.15. Unfortunately, those healthy earnings could not save the solar equipment maker, and a flurry of downgrades quickly followed.
Bank of America immediately downgraded Enphase to Underperform from Neutral with a $169 price target down from $227, saying the weak outlook shows "demand headwinds are here, and they will linger. Headwinds to near term growth are bolstered by weak sell through trends in the distributor channel and inflexible cash advance terms to installers, which leave ongoing challenges throughout 2023," BofA's Julien Dumoulin-Smith said.
However, other Wall Street analysts were much more positive about this company.
BMO Capital maintained its Outperform rating but lowered its PT to $275, saying Enphase's cautious tone on U.S. growth was more downbeat than expected. However, the analyst was more upbeat than BofA, saying "important positives that emerged during [the post-earnings] call should not be overlooked," and that Enphase’s growing IQ8 mix continues to drive consolidated margin improvement.
Raymond James analyst Pavel Molchanov said net metering reforms in California is likely to create Q2 headwinds for Enphase, but noted the company has been doing extremely well in Europe, with the two catalysts "essentially canceling each other out.’’
Wells Fargo said the ENPH selloff is overdone since the lower guidance around Q2 battery shipments is temporary and sales will increase in the latter half of the current year when the third-generation battery is released. Further, WF noted the company’s core microinverter business remains in the pink of health with Q1 shipments exceeding consensus and Q2 guidance largely in-line.
Cowen kept its Outperform rating, saying Enphase is best positioned over the long term with the stock's weakness as a buying opportunity for long term investors despite the U.S. residential solar market facing near term challenges.
#4. Tesla Inc.
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Market Cap: $512.9B
YTD Returns: 49.2%
Interestingly, the main reason why ENPH has been selling off heavily could turn out to be a blessing for EV and rooftop solar manufacturer, Tesla Inc. (NASDAQ:TSLA). TSLA has been selling off heavily after the company’s profit margins shrunk markedly in its latest quarterly report due to heavy price cuts as well as CEO Elon Musk’s controversial comments:
“We're the only ones making cars that technically we could sell for zero profit for now, and then yield actually tremendous economics in the future through autonomy. I'm not sure how many of you will appreciate the profundity of what I've just said, but it is extremely significant,” Mr Musk said on April 19.
That said, investors have mainly been overlooking Tesla’s solar and storage business despite the segment having immense growth potential.
Basically, what spooked investors during the ENPH and solar sector selloff was that new regulations in California that allow solar buyers a much smaller credit on their bills for the electricity they feed back to the grid, will result in a large slowdown in installations unless solar companies are able to counter by lowering product prices.
California NEM 3.0 legislation--also known as the Solar Billing Plan--is a new version of net energy metering policy that took effect on April 15, 2023. NEM 3.0 features a 75% reduction in export rates (excess electricity pushed onto the grid by solar systems), which in turn will reduce the overall savings and increase the payback period of home solar. This new policy is designed, in part, to encourage homeowners to pair their solar panels with battery storage in a bid to become more self-sufficient and also contribute to a more resilient electricity grid.
In other words, the new legislation is likely to encourage uptake of Li-ion batteries, a boon for battery manufacturers like Tesla Inc. Introduced by Tesla in 2015 just three years after the company expanded into solar and clean energy, the Tesla Powerwall is one of the most popular solar batteries available today, with the storage business managing to pull in a billion dollars in revenue over the last three consecutive quarters. This could only be the beginning for Tesla, with Bloomberg New Energy Finance (BNEF) predicting that energy storage installations across the globe will reach a cumulative 411 gigawatts (or 1,194 gigawatt-hours) by the end of 2030, a 15-fold increase on the 27GW/56GWh of storage that was online at the end of 2021.
By Alex Kimani for Oilprice.com
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