Supported by spending cuts and rebounding oil and gas prices, the energy sector hit a multi-year high in June. In fact, with more than 41% returns for the year to date, compared to a dismal 13% loss for the S&P 500 index, the sector remains the top performer so far this year, as of 1 August.
While the surge in energy costs is blamed for fuelling red-hot inflation, it bodes well for leading energy producers. The following stocks are some of the biggest gainers of the secular trend, each offering a dividend that’s nothing to sneeze at.
Integrated oil and gas major ExxonMobil (XOM) explores for, produces, and refines oil around the world. The company is the world’s largest refiner and one of the world’s largest manufacturers of commodity and speciality chemicals.
“Exxon reported a sharp increase in earnings as it leveraged past investments and cost reductions to fully capitalize on high commodity prices and strong refining margins,” says a Morningstar equity report about the firm’s recent earnings results.
A low-cost position combined with attractive upstream and downstream growth should make Exxon a winner, the report adds.
While many of its peers have announced intentions to pivot toward renewables to improve their ESG credentials, Exxon remains committed to oil and gas. The end of oil is likely to occur, but not anytime soon, says Morningstar equity analyst Allen Good.
“Furthermore, gas is likely to have an even longer life thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power,” says Good, who recently raised the stock’s fair value to US$96 from US$76 after incorporating the financial results.
These trends along with the growing demand for chemicals are what drive Exxon’s investment strategy and will likely deliver superior returns, Good claims.
Despite the strong performance, management maintained its existing US$30 billion share repurchase program to improve the balance sheet including a higher cash balance in the event of a down cycle. Given strong market conditions, however, the company will eventually increase shareholder returns, Good contends.
The second-largest US oil company, Chevron (CVX), explores, produces, and refines oil worldwide. The firm’s production activities take place in North America, South America, Europe, Africa, Asia, and Australia. Its refineries are located in the US and Asia.
Chevron’s second-quarter earnings blew past market expectations and demonstrated the company’s leverage to commodity prices and relatively low-cost position, which is a source of its narrow moat.
“As demonstrated by second-quarter earnings and the [share] repurchase increase, Chevron continues to be one of the best ways to capitalize on higher oil and gas prices among the integrated oils,” says a Morningstar equity report, adding that “Chevron remains a safe pick given asset quality and management discipline.”
Chevron is projected to deliver higher returns and margin expansion boosted by an oil-leveraged portfolio as well as the next phase of growth, which is focused on developing its large, advantaged Permian Basin position.
“Chevron’s Permian growth will be supplemented by expansion projects at Tengiz in Kazakhstan, due to begin producing in mid-2023, new developments in the Gulf of Mexico, and potential new discoveries in Mexico and Brazil,” says Good, who recently raised the stock’s fair value to US$142 from US$128, incorporating the latest strategic guidance and financial results as well as updated commodity prices.
The Noble acquisition has further boosted Chevron’s growth options by way of offshore gas fields in the Eastern Mediterranean.
French oil and gas giant TotalEnergies (TTE) explores for, produces, and refines oil worldwide. It owns and operates refineries primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and speciality chemicals. Total also has a 19% stake in Russian oil company Novatek.
TotalEnergies reported strong second-quarter results thanks to higher commodity prices, wider refining margins, and strong trading results.
The company decided against increasing dividends or an aggressive share repurchase program choosing instead to make strategic acquisitions. “Management has been more aggressive with respect to acquisitions this year, completing US$2.1 billion in net acquisitions through the first half of the year, largely for offshore Brazilian oil assets,” says a Morningstar equity report.
The European oil behemoth has announced other deals including the acquisition of a 50% interest in US renewable energy company Clearway Energy Group, interest in the Qatar liquid natural gas expansion project, and interest in a green hydrogen project in India.
“Retaining the ability to do larger, opportunistic deals while maintaining a strong balance sheet is likely behind the decision not to increase repurchases at this stage,” says Good. He has upped the stock’s fair value to US$68 from US$60, incorporating the latest capital spending guidance, financial results and oil prices.
TotalEnergies aims to achieve net zero emissions by 2050, not by moving away from oil and gas but by expanding its ownership of renewable power and low carbon assets over time.