Companies shunned when climate concerns reached Wall Street have made a stunning stock market comeback
Author of the article:
Financial Times
Derek Brower in New York
Published Dec 29, 2022 • 3 minute read
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Of the 25 performers in the benchmark S&P 500 index of stocks, as many as 15 will be fossil-fuel operators. Photo by Apu Gomes/AFP via Getty Images Oil and gas groups are set to dominate the list of best-performing stocks in the United States in 2022, after bumper profits following Russia’s invasion of Ukraine drew investors back to the sector.
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Of the 25 performers in the benchmark S&P 500 index of stocks, as many as 15 will be fossil-fuel operators. Occidental Petroleum Corp. is likely to top the list, with its shares up about 120 per cent this year.
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The energy sector has climbed almost 60 per cent, a sharp contrast with a 21 per cent drop in the S&P 500 as a whole and a stunning stock market comeback for companies that were shunned when climate concerns reached Wall Street in recent years.
The turnaround is especially stark in the U.S. shale sector, where a decade of debt-fuelled drilling brought low and volatile returns. Occidental Petroleum was a prime example when it borrowed US$40 billion to buy a rival in 2019, driving shares down by almost 90 per cent in two years.
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But the oil price recovery over the past 18 months, coupled with operators’ stingier capital spending, has yielded a torrent of free cash flow, transforming the sector’s financial position.
“Companies have pristine balance sheets, there’s very little near-term debt risk, and (they) are … moving forwards towards a net-cash position” while offering bumper dividends and share buyback programs, said Matt Portillo, head of research at TPH&Co., an investment bank. “In a recessionary environment, that’s a great spot to be in.”
The surge in crude prices as a result of the war in Ukraine has bolstered the sector, with U.S. oil and gas companies recording US$200 billion in net profits in the two quarters following Russia’s full-scale invasion.
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It has also brought a political backlash, with U.S. President Joe Biden describing oil companies’ buoyant returns this year as the “windfall of war” and his senior energy adviser, Amos Hochstein, labelling Wall Street’s pressure on shale groups not to increase drilling as “un-American.”
In the third quarter, ConocoPhillips, Occidental Petroleum, EOG Resources Inc., Pioneer Natural Resources Co. and Devon Energy Corp. — the shale patch’s five biggest independent producers — reported more than US$16 billion in combined free cash flow, a record high.
The cash bonanza means U.S. oil and gas companies could become debt-free by 2024, wiping out more than US$300 billion in losses accumulated in the decade leading up to the coronavirus pandemic, according to Deloitte Touche Tohmatsu Ltd.
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Asset managers are now flooding back into energy stocks, analysts said, helping the sector’s share of the S&P 500 more than double to about five per cent.
The rally has pulled up some clean energy equities, too. Solar panel manufacturers such as Enphase Energy Inc. and First Solar Inc. — beneficiaries of the Biden administration’s move to reshore clean energy supply chains in the U.S. — are among the S&P 500’s leading performers.
But the trend has not been evident across the board, with NextEra Energy Inc., Avangrid Inc. and others falling back.
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Article content In oil and gas, however, the equity price surge has been almost universal, from independent gas producers such as EQT Corp. to the integrated supermajors. ExxonMobil Corp.’s market capitalization recently surpassed that of electric car maker Tesla Inc., whose shares have plunged more than 50 per cent since chief executive Elon Musk bought social media platform Twitter Inc. in October.
Expectations for higher oil prices next year will add momentum to a rotation away from tech and other growth stocks to value stocks, such as producers of oil and other commodities that have historically offered a safe haven during economic downturns, analysts said.
“Being underweight energy is going to be a tough proposition for a lot of mutual funds going forward,” Portillo said.
© 2022 The Financial Times Ltd.