Analysis: Sizzling rally in US energy stocks confronts global growth concerns

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Storage tanks are seen at Marathon Petroleum’s Los Angeles refinery, which processes domestic and imported crude oil, in Carson, California, United States, March 11, 2022. Photo taken with a drone. REUTERS/Bing Guan/File Photo

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NEW YORK, June 1 (Reuters) – The surge in U.S. energy stocks has forced investors to make a tough decision: hold on despite growing fears that global growth will slow or stall profits in one of the few sectors of the stock market that has flourished this year.

The S&P 500 (.SPNY) energy sector has jumped 55.7% year-to-date on soaring oil prices, making it a welcome counterweight to portfolios over the past year. a year in which the S&P 500 (.SPX) fell 13.3%. Read more

Some individual energy names have generated returns more generally seen in high-flying technologies over the past decade: Exxon Mobil Corp (XOM.N) and Chevron Corp (CVX.N) have gained 57% and 49%, respectively, since the beginning of the year. , while Occidental Petroleum Corp (OXY.N) climbed around 140%. U.S. crude oil prices have jumped 53% year-to-date, supporting oil and gas stocks even as they help fuel the strongest inflation in decades. Read more

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So far, energy stocks have resisted hawkish pivots from the Federal Reserve and other central banks, which have fueled concerns that slowing growth could dampen demand for energy. Still, there are signs that some investors may be taking profits: While the sector is up 11% since late April, there have been five consecutive weeks of net outflows for energy sector funds overall. , according to data from Refinitiv Lipper.

“The fundamentals have really improved this year for the group,” said James Ragan, director of wealth management research at DA Davidson. “The risks are that if we go into some sort of deeper recession globally, you could see demand destruction.”

Investors sticking to their energy bets cite the sector’s strong earnings outlook, valuations that remain low on a historical basis and expectations that oil prices will remain high following the conflict in Ukraine that has tightened the offer.

Earnings for S&P 500 energy companies broadly beat expectations in the first quarter and are expected to more than double in 2022, compared to a 9% rise for the broader S&P 500, according to Refinitiv.

According to Refinitiv Datastream, 21-stock energy companies are trading at 10 times forward earnings estimates overall, compared to a long-term median of 15.5 times. The S&P 500 is trading around 17x, by comparison.

Energy stocks “do not have a history of secular growth like Tech, so investors only pay attention to these names when they outperform significantly on the bottom line and estimates rise,” wrote Nicholas Colas, co-founder from DataTrek Research, in a recent note. “It’s happening now and given the low estimates for 2023, we expect it to continue.”

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Some investors believe that more disciplined capital spending by companies is bolstering support for the sector.

For example, 727 rigs are operating in the United States, according to Baker Hughes’ latest count, compared to more than 1,800 in mid-2014, when US crude last exceeded $100 a barrel.

“In previous cycles … companies spent like drunken sailors to put new rigs in the ground and find oil,” said Walter Todd, chief investment officer at Greenwood Capital, which owns stocks such as Chevron and EOG. Resources Inc (EOG.N). Now, “the cash profile of these companies is unlike anything we’ve seen in this space in a long, long time.”

Others, however, worry that demand could decline as China’s economy is hit by coronavirus-related lockdowns or if the US economy slips into a recession – a possibility as the Fed pledges to tighten policy. monetary policy until it brings inflation under control. Read more

Last month, the CFRA lowered its recommended exposure to the energy sector from “market weight” to “overweight”, saying that “due to the growing risk of recession or stagflation, the CFRA believes that the global demand will struggle to stay strong.”

Stocks could also suffer if investors return to technology or other areas of the market punished by this year’s selloff. The energy sector is up about 40% over the past decade, compared to a gain of about 450% for the S&P 500 (.SPLRCT) technology sector.

Part of this underperformance is due to investors avoiding oil companies and fossil fuels for environmental reasons.

Still, investors recognize that it may take some time before alternative energy sources become mainstream, said Hans Olsen, chief investment officer at Fiduciary Trust Company, who has a positive view of the energy sector. energy.

“You have both a valuation argument and … the operating environment we’re in right now is really, really positive for energy companies,” Olsen said.

weight in S&P 500
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Reporting by Lewis Krauskopf in New York Editing by Ira Iosebashvili and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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