The current year is shaping up as another lackluster year for the U.S. energy sector, with oil and gas stocks sitting out a wider market rally. The energy sector’s favorite benchmark, the Energy Select Sector SPDR Fund (XLE), is up a mere 0.1% compared to a nearly 7% gain by the broad market benchmark, S&P 500. In sharp contrast, in a true reversal of fortunes, the technology sector has emerged as the class valedictorian, with the the tech-heavy NASDAQ Composite Index up 13.5% in the year-to-date while the semiconductor sector’s leading benchmark, iShares Semiconductor ETF (SOXX), has rocketed 20.7% YTD.
There are a couple of reasons why oil and gas stocks are lagging the market in 2023 after outperforming in 2022. First off, easing inflation as well as a less hawkish Fed have increased optimism for a 'soft landing' for the economy, sending growth stocks higher at the expense of cyclicals. Further, unlike last year when they hit multi-decade highs, oil prices have merely been treading water in the current year while natural gas prices have tumbled sharply after a warmer-than-expected winter in Europe took a toll on demand.
Still, there is no shortage of positive catalysts for the energy sector. Energy stocks are, surprisingly, still among the cheapest in the market despite last year’s huge rally. Second, seasonal demand is expected to increase in spring while China's full reopening post Covid lockdowns is also expected to fuel oil demand. Related: Saudi Arabia’s Oil Revenues Hit $326 Billion In 2022
"I overwhelmingly prefer energy stocks over technology stocks. Energy has much stronger forecasted revenue and earnings, plus continues to trade well below the PE ratio for the S&P 500," Louis Navellier of Navellier Calculated Investing recently told Yahoo Finance.
Here are the best and worst performers in the energy sector so far this year.
- BP Plc
YTD Returns: 16.6%
Last year, BP Plc (NYSE: BP) underperformed the sector after the company took a massive $24.4 billion impairment charge after exiting its 19.75% shareholding in Rosneft PJSC and its other business in Russia. But the British oil and gas giant surprised everybody when it reported on a record profit of $28 billion for FY 2022 and even hiked its dividend. The company reported sales and other operating revenues of $70.36B, good for +34.7% Y/Y growth. Shareholders are also happy that BP scaled back former plans to slash oil and gas output and reduce carbon emissions by 2030.
- Marathon Petroleum Corporation
YTD Returns: 10.4%
Shares of the U.S.’ largest independent refiner, Marathon Petroleum Corp. (NYSE: MPC), have been rallying after the company reported good Q4 results and issued an impressive 2023 outlook. Q4 Non-GAAP EPS of $6.65 more than quadrupled and beat the Wall Street consensus by $1.02 while revenue of $40.09B (+12.6% Y/Y) beat by $4.8B. EBITDA in the pivotal refining and marketing segment surged to $4.6B from $1.5B a year earlier thanks to refining margin jumping to $28.82/bbl from $15.88/bbl in the same period last year.
Marathon Petroleum also said it expects lower capital spending in 2023 of $1.3B, with 40% of growth capital going into low-carbon projects.
- Enterprise Product Partners L.P.
YTD Returns: 8.9%
Enterprise Product Partners L.P. (NYSE: EPD) provides midstream energy services to producers and consumers of natural gas and natural gas liquids. Master Limited Partnerships (LPs) have generally outperformed plain vanilla oil and gas stocks in the current year thanks to their less exposure to oil and gas prices as well as more predictable revenues and cash flows, and EPD has not disappointed.
EPD reported revenue of $13.65B, good for +20.1% Y/Y growth For 2023 and expects growth capital investments to be approximately $2.3 billion to $2.5 billion. But what particularly excited shareholders is the fact that the company’s Distributable Cash Flow (“DCF”) increased 17 percent to $7.8 billion for 2022 compared to $6.6 billion for 2021. Like many MLPs, EPD is a big-dividend payer, with current yield at 7.43%.
- Shell Plc
YTD Returns: 8.4%
Shell Plc (NYSE: SHEL), the FTSE 100‘s largest company, reported record 2022 profits thanks to impressive profits from gas trading, reversing an early-year trend when its trading segment performed poorly. Shell’s full-year adjusted earnings more than doubled to $39.9B, smashing the company's previous all-time high of $28.4B set in 2008. Q4 adjusted earnings of $9.81B was the company's second-highest quarterly earnings, way better than the Wall Street consensus of $7.97B. Nearly two-thirds of Q4 profit came from Shell’s integrated gas business, which generated adjusted earnings of $6B despite lower oil and gas prices. Shell increased its dividend by 15% with the shares now yielding 3.4%.
Shell also announced that it would keep its renewable energy spending flat in the current year after spending a record $3.5B in 2022.
- Valero Energy Corp.
YTD Returns: 8.0%
Valero Energy Corp. (NYSE: VAL) shares have been on the move after the company’s refining margins and profits hit all-time highs. Valero reported full-year net income of 4.25B, a massive 223% Y/Y increase while revenue of $41.74B increased 16.3% from the previous year. The company also paid down $2.7 billion debt in 2022, bringing its aggregate debt reduction since the second half of 2021 to $4.0 billion.
- APA Corporation
YTD Returns: -12.7%
APA Corporation (NASDAQ: APA)--formerly named Apache--shares have come under pressure following the natural gas selloff despite APA deriving only 18% of its revenue from natural gas. It appears that the market is worried by the company’s huge debt load, with the company having a high liability to asset ratio of 88%.
However, there is one big reason to like this stock. Last week, the company announced that it had successfully drilled and flow tested an appraisal well offshore Suriname, with the company estimating the deposit could hold more than 200M barrels in reserves. APA, and its 50-50 partner TotalEnergies (NYSE: TTE), have now successfully drilled two appraisal wells with another two scheduled for drilling in Suriname's Block 58.
- Devon Energy Corporation
YTD Returns: -8.2%
Devon Energy Corp. (NYSE: DVN) shares have been sliding after the company missed earnings forecast, gave weak guidance for 2023 production and also guided for higher-than-expected capex.
Devon said it expects Q1 production to clock in at ~635K boe/day, well below the 657K boe/day analyst consensus estimate, with the company attributing it to a fire at a key gas compression station in Texas last month. The company also guided for higher than expected capital spending of $3.6B-$3.8B which the company revealed is due to temporary addition of a fourth frac crew in the Delaware Basin to make up for production losses.
YTD Returns: -8.0%
ConocoPhillips (NYSE: COP) is under scrutiny due to its Willow project on Alaska's North Slope. The Biden administration has finalized its environmental review of the project, laying the groundwork for approval next month in what would be the largest U.S. oil development on public lands.
Unfortunately, Bloomberg has reported that some opponents of the project are urging the administration to approve the project in such a scaled-back way that it no longer makes economic sense. "We are concerned by the suggestion that the administration could potentially deny this project through deferring or delaying some of the drilling locations," an American Petroleum Institute official said. The U.S. Interior Department has already expressed"substantial concerns" about the Willow project.
- Ovintiv Inc.
YTD Returns: -7.4%
Ovintiv Inc. (NYSE: OVV) is another stock that is being unfairly punished by the market despite being one of the cheapest energy stocks.
Last month, OVV made it to Credit Suisse’s best-of-the-best picks list, with the investment bank using the following criteria:
- Highest conviction Outperform ideas where estimates and target prices are above consensus and consensus is not overly bullish.
- Outperform ideas with least demanding market expectations.
- Chesapeake Energy Corp.
YTD Returns: -7.0%
Chesapeake Energy Corporation (NASDAQ: CHK) is another natural gas stock getting pummeled but has gained slightly on Monday’s early intraday trading ahead of its Q4 2022 earnings report on Tuesday.
Last month, Mizuho pointed at Chesapeake alongside Exxon Mobil (NYSE: XOM), Diamondback Energy (NASDAQ: FANG), Coterra Energy (NYSE: CTRA), Pioneer Natural Resources (NYSE: PXD) and Valero Energy as its top energy picks.
By Alex Kimani for Oilprice.com
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