Oil stocks continued to show a clear disconnect from the commodities they track, with oil stocks mounting a strong rally even as oil prices have fallen since the OPEC meeting. Over the past 30 days, the main benchmark in the energy sector, the SPDR Energy Select Sector Funds (NYSEARCA: XLE), climbed 24.6% while average crude spot prices fell 8% during the period. XLE is now posting a return of 52.9% since the beginning of the year, compared to a decline of 20.0% by the S&P500.
There is a method to the madness, however.
We’re still in the early innings of the Q3 2022 earnings season, but so far it’s looking better than expected. According to FactSet income informationfor Q3 2022 (with 20% of S&P 500 companies reporting actual results), 72% of S&P 500 companies reported positive EPS surprise and 70% reported positive earnings surprise, with both numbers higher to previous projections.
The energy sector shows the largest increase in net profit margin over the 5-year average (14.6% vs. 6.8%). While oil and gas prices have fallen from recent highs, they are still much higher than they have been for the past two years, hence the continued enthusiasm in oil markets. ‘energy. Indeed, the energy sector remains a strong favorite on Wall Street, with the Zacks Oils and Energy sector being the highest-ranked sector among the 16 Zacks-ranked sectors.
Unfortunately, the energy sector also leads in an undesirable measure: downgrades. Downward revisions to revenue estimates by major oil companies, including Chevron inc. (NYSE: CVX) from $60.8 billion to $57.4 billion, Conoco Phillips (NYSE: COP) from $19.8 billion to $18.0 billion, Exxon Mobil (NYSE: XOM) from $106.0 billion to $104.6 billion, and Phillips 66 (NYSE: PSX) from $40.5 billion to $39.4 billion largely contributed to the decline in the industry’s revenue growth rate. As a result, the energy sector’s blended revenue growth rate fell to 32.2% from the consensus projection of 35.5% just a month ago. According to analysts, most companies in the energy sector are revising their revenue and profit estimates downwards mainly due to the high volatility in the energy markets. For instance, SA Shell (NYSE: SHEL) recently released a weak trade update:
“The earnings estimate ($8.2bn) is 8% below consensus and we believe the gas trade issues in Q3 could extend into 4Q if the JKM-TTF differential widens again,“said Jefferies. JKM (Japan-Korea Marker) generally acts as a satellite price against the price of the more liquid benchmark European gas hub TTF (Title Transfer Facility). JKM’s liquidity has evolved rapidly over the past 3 years. The growth in spot transaction liquidity has seen JKM increasingly used as a basis for physical transactions (both in and out of Asia) as well as increasingly as a contractual reference point for products. derivatives (eg JKM swaps) and even medium and long-term supply contracts.
Share buybacks
Fortunately, investors chose to focus on the big picture rather than short-term volatility. Additionally, industry earnings are expected to remain strong due to high levels of share buybacks. Oil and gas supermajors are on track to buy back their shares at near-record levels this year thanks to soaring oil and gas prices, helping them generate windfall profits and boost yields for Investors.
According to data from Bernstein Research, the seven supermajors are on track to return $38 billion to shareholders through buyout programs this year, with investment bank RBC Capital Markets putting the total figure even higher, at 41. billions of dollars.
In 2014, when oil was trading above $100 a barrel, we only saw $21 billion in buybacks. This year’s figure greatly exceeds that of 2008.
But here’s another interesting thing: Big Oil’s capital expenditures and production have remained virtually flat despite the reports. record profits in the second quarter.
Data from the US Energy Information Administration (EIA) shows that major oil companies mostly cut capital spending and production in the second quarter. An EIA review of 53 state-owned U.S. oil and gas companies, responsible for about 34% of domestic production, showed a 5% decline in capital spending in the second quarter compared to the first quarter of this year.
Cheap energy stocks
Another surprising finding: energy stocks remain cheap despite the huge rush. Not only has the sector significantly outperformed the market, but companies in this sector are relatively cheap, undervalued and have above-average projected earnings growth.
Image source: Zacks Investment Research
Some of the cheapest oil and gas stocks right now include Ovintiv Inc. (NYSE: OVV) with a PE ratio of 5.46; Civitas Resources, Inc. (NYSE: CIVI) with a PE ratio of 4.97, Enerplus Corporation (NYSE:ERF)(TSX:ERF) has a PE ratio of 5.84, Western Oil Company (NYSE: OXY) has a PE ratio of 6.84 while Canadian Natural Resources Limited (NYSE: CNQ) has a PE ratio of 6.79.
By Alex Kimani for Oilprice.com
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