The oil and gas group is expected to dominate the list of best-performing US stocks in 2022, after bumper profits following Russia’s invasion of Ukraine lured investors back into the sector.
Of the 25 performers in the benchmark S&P 500 stock index, up to 15 will be fossil fuel miners. Occidental Petroleum is likely to top the list, with its shares up about 120 percent this year.
The energy field rallied nearly 60%, contrasting sharply with the overall S&P 500’s 21% drop and the stock market’s spectacular return to companies once shunned as climate concerns spread to St. Wall in recent years.
The shift is particularly pronounced in the US shale sector, where a decade of debt-driven drilling has yielded low and volatile returns. Occidental Petroleum is a prime example when it borrowed $40 billion to buy a rival in 2019, sending the stock down nearly 90% in two years.
However, the recovery in oil prices over the past 18 months, coupled with tighter capital spending by operators, has created a free cash flow that has transformed the financial situation of the industry.
“Companies with pristine balance sheets have very little risk of short-term debt and [they] to be . . . “Going to a net cash position” while offering dividend buyback and bumper dividend programs, said Matt Portillo, head of research for TPH&Co, an investment bank.
“In a recessionary environment, it’s a great place to be in.”
Rising crude prices due to the war in Ukraine have boosted the sector, with US oil companies recording $200 billion in net profit in the two quarters following Russia’s all-out invasion.
It also provoked a political backlash, with US president Joe Biden describing the strong gains for oil companies this year as “fortunes of war” and his senior energy adviser, Amos Hochstein, consider Wall Street’s pressure on shale corporations not to increase drilling activity as “non-American”.
In the third quarter, ConocoPhillips, Occidental, EOG Resources, Pioneer Natural Resources and Devon Energy — the five largest independent producers of the shale array — reported combined free cash flow of more than $16 billion, a record high. .
Cash Fortune Means USA oil and gas companies could be debt-free by 2024, wiping out more than $300 billion in losses accumulated in the decade leading up to the coronavirus pandemic, according to Deloitte.
Asset managers are now turning to energy stocks, analysts say, helping the sector’s share of the S&P 500 more than double to about 5%.
The rally has also pulled some clean energy stocks up. Solar panel manufacturers such as Enphase Energy and First Solar — beneficiaries of the Biden administration’s move to restore clean energy supply chains in the US — are among the top S&P 500 producers.
But the trend isn’t evident across the board, with NextEra, Avangrid and others making a comeback.
In the oil and gas sector, however, stock price increases are nearly universal, from independent gas producers like EQT to large integrated companies. Recent ExxonMobil Market Cap overtake electric car maker Teslawhose stock has fallen more than 50% since chief executive Elon Musk bought social media platform Twitter in October.
Expectations of higher oil prices next year, analysts say, will add further impetus to the shift away from technology and other growth stocks to value stocks, such as oil producers. and other commodities that are safe havens during economic downturns.
“The lack of energy will be a difficult proposition for many mutual funds going forward,” Portillo said.