Energy has been the one bright area in the U.S. stock market so far this year, with many stocks gaining on the back of skyrocketing oil prices. The past month has been rough for many energy stocks, but Monday morning brought a resumption of the rise in oil prices, carrying many energy companies along with it.
Energy earnings to save the S&P 500 in Q2
Wells Fargo estimates that energy earnings will grow by significantly more than 200% for the second quarter, almost tripling their year-ago profits. In fact, consensus estimates would call for a decline in S&P 500 earnings if it weren’t for energy.
Although energy makes up only 4.2% of the index, removing their earnings numbers would result in a probably decline of 2% in earnings for the entire S&P. Including energy, analysts are looking for the index’s earnings to rise by about 5.7% for the second quarter.
JPMorgan analysts feel that the energy sector has the most attractive risk/ reward profile right now. Of course, there are many companies to choose from, so here are some stocks that could be the best of the best sector to own right now.
One of the year’s strongest performers is Devon Energy, which is up by more than 20% year to date. Although the stock is down by about 9% for the last month, it’s up more than 7% in the last five trading days, with more than half of that gain coming on Monday.
One thing that makes Devon Energy a potential winner is its attractiveness as a dividend stock. The independent oil and natural gas exploration company is a lesser-known name, but its dividend makes it worthwhile for investors to check it out.
Devon’s dividend yield has approached 10% this year, although it has fallen more recently to about 7%. What’s interesting about this company is the structure it uses for its dividends. Devon Energy pays out a fixed quarterly dividend of 16 cents per share plus a variable dividend that can be as high as 50% of its excess free cash flow.
The company has also benefited greatly from rising oil prices. For the first quarter, Devon reported a 74% year-over-year increase in revenue to $4.3 billion and a 364% increase in net income. Earnings per share more than tripled to $1.48, while its net profit margin rose more than 167% to 23.1%.
Marathon Oil is a much more well-known name than Devon Energy. The stock is up by more than 28% year to date. Although it’s down by about 13% for the last month, it has gained almost 6% in the last five trading days.
Marathon Oil’s specialty is hydrocarbon E&P after spinning off from Marathon Petroleum in 2011. However, it’s not a pure play on the rising oil prices, as about half of its asset portfolio consists of petroleum, with the other half being natural gas.
Marathon Oil enjoyed a robust first quarter with a 50% increase in revenue to $1.77 billion and a more than 1,200 increase in net income to $1.3 billion. Diluted earnings per share rose almost 1,400% to $1.78 per share, while the net profit margin rose almost eightfold to 73.71%.
Aside from rising oil prices, Marathon Oil also benefited from robust production at 281,000 barrels of oil equivalent per day, including 158,000 barrels of oil, with the rest being natural gas and natural gas liquids.
Another well-known oil play is Chevron, which enjoys a strong balance sheet, among other attractive features. The stock is up by about 18% year to date. Although it has declined by about 10% in the last month, it’s up by about 1% over the last five trading days.
The oil major also enjoyed solid growth in the first quarter, with a 68% increase in revenue to $52.3 billion and net income that more than tripled to $6.26 billion. Diluted earnings also rose more than threefold to $3.22 per share, and Chevron’s profit margin increased by about 170% to 11.96%.
The company is preparing to sell its campus in California and move the bulk of its operations to Texas, which should also bring in some added cash flow.
Oil major ExxonMobil has been enjoying a banner year. Its stock is up by about 36% year to date. Although it’s off by more than 5% over the last month, it has increased 3% over the last five trading days, with most of the gain coming on Monday.
While many oil companies have been warning that the transition to green energy will reduce demand for oil and gas, ExxonMobil has continued to invest in producing both commodities. The company is betting that the world will continue using fossil fuels in the medium term, a play that Credit Suisse analysts agree with.
Like the other names on this list, ExxonMobil also displayed robust growth in the first quarter, although the percentages are smaller because they’re coming off significantly larger bases. The oil giant grew its revenue by more than 50% year over year to $87.96 billion and doubled its net income to $5.5 billion. Diluted earnings per share also doubled to $1.28 per share, and the company’s profit margin increased by more than 30% to 6.23%.
ExxonMobil has a strong balance sheet that will enable it to withstand any major market turmoil. The company’s low-cost project pipelines in and around Permian, the most prolific U.S. basin, are also serving it well.
Shell shares are up by only 9% year to date, with more than 2% of that gain coming on Monday alone. While oil plays a crucial role in the bull case for each of the above stocks, Shell is a leader in liquified natural gas, making it a major beneficiary of Europe’s energy crisis as it tries to shift away from Russian oil.
As of 2015, the European Union was importing enough LNG to meet more than 40% of the entire world’s gas demand. Additionally, much of Europe is turning to liquified natural gas to compensate for shortfalls in gas imported from Russia.
Like the other energy stocks on this list, Shell is enjoying a strong year. Its revenue rose more than 50% to $84.2 billion, while its net income increased by 26% year over year to $7.1 billion. Shell’s diluted earnings rose by 29% to 93 cents per share, although its net profit margin declined by 17% to 8.45%.
As a side note, Shell has also set a goal of reaching net-zero emissions by 2050.
Some of the luster has come off energy stocks over the last month, but the last week has brought a marked turnaround. Now with oil prices jumping on Monday, it’s looking like the story for energy stocks won’t be over anytime soon. Europe also continues to search for replacement sources of the energy commodities it has long been importing from Russia.
With all these factors, it looks like energy could have plenty of room left to run, even if the rest of the market remains lackluster for the time being.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
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