Displaying items by tag: oil

In an article for CNN Money, Krystal Hur covers why many Wall Street analysts continue to issue upbeat commentary and favorable ratings on energy stocks. This is despite the sector badly lagging the broader market in the first half of the year due to weakness in oil prices and underwhelming earnings results from the major oil producers. 

However, analysts continue to see value in the sector. The energy sector has a forward P/E of 10.5 which is nearly half of the S&P 500. They also like the long-term bullish case for energy given the lack of CAPEX in the space over the past decade despite continued demand growth. Additionally, this past year has seen output cuts from OPEC+ while the US has been buying oil to replenish the strategic petroleum reserve.

Currently, analysts have a buy rating on 60% of stocks in the energy sector which is the most by far. In the first half of the year, the Energy Select SPDR (XLE) was down 8% while the S&P 500 was up 15%. Some reasons are mean-reversion following the sector’s nearly 60% gain last year, a weaker-than-expected Chinese economy, and Russia and other countries finding ways to elude sanctions.

Finsum: Energy stocks underperformed in the first half of the year, but Wall Street analysts continue to remain bullish on the sector due to longer-term supply concerns and compelling value. 

In an article for Reuters, David Randall  discusses the outlook for the energy sector in the second-half of the year, and why some contrarian investors are betting on a rebound. In the first-half of the year, energy underperformed the broader market despite economic growth performing better than expected, while OPEC countries embarked on supply cuts.

The major headwind for oil has been weak demand from Europe and China, resulting in oil prices that are down 10% YTD. Despite expectations of continued rate hikes in the coming months, many investors are increasing exposure to energy stocks due to attractive valuations and expectations of a pickup in economic growth. 

Supply cuts from OPEC should also support the market especially as domestic US production has also been trending lower in recent months, reaching their lowest levels since April of last year. 

On a valuation basis, the sector is quite cheap relative to the broader market with a cumulative forward price to earnings ratio of 10.4, while the S&P 500 has a forward price to earnings ratio of 19. The energy sector also pays a better yield at 3.9% vs 1.5%.

Finsum: Energy stocks underperformed in the first-half of the year following a strong 2022. Here’s why some are betting on a rebound in the second-half of the year. 

In 2022, the energy sector was one of the few parts of the market that delivered positive returns for investors due to higher than expected global demand while supply was impacted by Russia’s invasion of Ukraine. However, the story is much different in 2023 as the sector is down 4% YTD, while the S&P 500 is up more than 16%. 

In Q2, energy stocks also lagged the market as covered by David Meats for Morningstar. Not surprisingly, the major reason is that oil prices were down by 10% and natural gas was off by 27%. Many were caught offside by weakness in oil given cuts from OPEC over the past few months.

According to Meats, energy stocks remain overvalued as most investors continue to assume higher prices. While he is shying away from most parts of the energy sector, he sees value in oilfield services. 

He believes the global oil market will be in a small deficit over the next couple of quarters due to the aforementioned cuts from OPEC in addition to stronger than expected economic growth. In total, he expects 2024 production to be about 1.1 million barrels per day lower than 2023. 

Finsum: Energy has underperformed in 2023 despite cuts from OPEC and a better than expected economy. While most energy stocks are not attractive from a value perspective, oil services are an exception.

In an article for Bloomberg, Will Mathis covers how Shell and BP are retreating from its renewable energy projects in wind and solar due to lackluster returns and increased competition. It’s leading to opportunities for renewable firms who are no longer facing competition from Big Oil who are subsidizing projects with profits from oil and gas. 

As these oil & gas companies entered the renewable space, they were willing to bid at lower prices than renewable firms in order to win government contracts, notably in offshore wind. However, returns on these projects have been middling, in part, due to inflation and supply chain constraints for key components. 

Less than 4 years ago, Shell’s ambition was to be the world’s biggest producer of renewable energy. Now, it no longer has any sort of goal for renewable energy capacity and recently announced that it is upping capital expenditures on fossil fuels, likely due to continued, higher returns in the space. Similarly, BP is shifting away from solar and wind for similar reasons. Instead, it’s increasing spending on its biofuels and service stations while cutting back on renewables. 

Yet, cumulative, global investments in renewables continue to increase with an expected $1.7 trillion in 2023 according to the IEA which is the 8th straight year of growth. 

Finsum: Fossil fuel companies like BP and Shell are pulling back from renewable energy projects. However, global investment in renewables continues to increase, reaching an expected $1.7 trillion in 2023. 

Even at his advanced age, Warren Buffett continues to make prescient moves. The most recent example includes loading up on energy stocks just prior to the sector’s incredible gains in 2020 and 2021. While prices have receded amid concerns that a recession is near, Buffett is using the weakness to increase his exposure to the sector.

However, his most aggressive bet in the sector is on Occidental Petroleum of which Berkshire owns 222 million shares which is equivalent to nearly 25% of the company’s market cap. While Occidental is an integrated operator, the bulk of its revenues are from drilling which means that it’s sensitive to swings in the price of crude oil.

Based on his public comments, Buffett sees the energy supply chain as being constrained given a lack of capital expenditures over the last decade, Russia’s invasion of Ukraine, and changes wrought by increased electrification. At the same time, global demand for oil continues to increase, leading to a tighter equilibrium between supply and demand. 

In addition to his Occidental investment, Buffett also has a $22 billion stake in Chevron. Additionally, Berkshire Energy contributes $25 billion of revenue to its parent company and is composed of power generation and distribution companies like pipelines, renewables, and utilities.

Finsum: Energy has delivered poor returns in 2023 amid increased supply and growing recession fears. However, Warren Buffett continues to increase his exposure to the sector.