Oil inventories show peculiar disconnect with crude prices

Oil stocks continue to exhibit an idiosyncratic disconnect with the commodity they track, posting a strong rally despite oil prices falling sharply since the last OPEC meeting. Over the past two months, the leading benchmark for the energy industry, Energy Select Sector SPDR Fund (NYSEARCA: XLE ) rose 34%, while the average crude oil spot price fell 18%. XLE has returned 61.2% year-to-date, the best of any market segment in the U.S. According to the Wall Street Journal Bespoke Investment Group, current split It was the first time since 2006 that the oil and gas sector traded within 3% of their 52-week highs, while WTI prices retreated more than 25% from their respective 52-week highs. It was also the fifth such split since 1990.

The US oil majors did not disappoint either: over the past two months, Exxon Mobil Corporation (NYSE: XOM) up 35.3%; Chevron Corporation. (NYSE: CVX ) rose 30.6 percent, ConocoPhillips (NYSE: COP ) rose 30.1%, Phillips 66 (NYSE: PSX ) rose 45.3%, while marathon oil co. (NYSE: MPC ) returned 40.3%. This trend holds true even on shorter time frames, with all stocks in the green for the past five sessions except for COP, which fell 0.5%.

There’s a way to be crazy, though.

Source: Wall Street Journal

strong earnings

Strong earnings from energy companies is a big reason why investors are still flocking to oil stocks.

The third-quarter earnings season is drawing to a close, but so far, things have been better than expected.according to Earnings Insights from FactSetfor Q3 2022, 94% of S&P 500 companies reported Q3 2022 earnings, with 69% beating EPS estimates and 71% beating revenue estimates.

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Related: Saudi Arabia, Iraq reiterate support for output cuts

The energy sector reported the highest earnings growth rate of all 11 sectors at 137.3%, compared to an average of 2.2% S&P 500 index. At the sub-sector level, all five sub-sectors of the industry recorded year-over-year revenue growth: Oil & Gas Refining & Marketing (302%), Integrated Oil & Gas (138%), Oil & Gas Exploration & Production (107%), Oil & Gas Equipment and services (91%) and oil and gas storage and transportation (21%). Energy was also the sector where most companies beat Wall Street estimates, at 81%. Marathon Petroleum ($47.2 billion vs. $35.8 billion), Exxon Mobil ($112.1 billion vs. $104.6 billion), Chevron ($66.6 billion vs. $57.4 billion), Valero Energy ($42.3 billion vs. $40.1 billion USD) and Phillips 66 ($43.4 billion vs. $39.3 billion) since Sept. 30 were significant contributors to the index’s revenue growth rate increase.

Even better, the outlook for the energy sector remains bright.According to a recent Moody’s Research Reportindustry earnings will generally stabilize in 2023, although they will be slightly below levels reached at recent peaks.

Analysts note that commodity prices have retreated from their early 2022 highs, but expect prices to remain cyclically strong through 2023. This, combined with modest growth in production, will support oil and gas producers generating strong cash flow. Moody’s estimates the US energy sector’s EBITDA will reach $623B in 2022, but fall to $585B in 2023.

Low capital spending, rising uncertainty about future supply expansion and high geopolitical risk premiums will continue to support cyclically high oil prices, analysts said.Meanwhile, strong export demand for U.S. LNG will continue to support high gas prices.

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In other words, there’s no better place for someone investing in the U.S. stock market if they’re looking for decent earnings growth. Moreover, the outlook for the industry remains bright.

Enthusiasm continues to run high in the energy market, although oil and natural gas prices have come off their recent highs but remain well above levels of the past few years. In fact, the energy sector remains a favorite on Wall Street, with the Zacks Oil & Energy sector being the highest-ranked sector of all 16 Zacks Rank sectors.

stock repurchase

Also, earnings in the sector are likely to remain elevated due to high levels of share buybacks. Oil and gas majors are on track to buy back shares at near-record levels this year as soaring oil and gas prices help them turn fat profits and boost investor returns.

The seven supermajors are poised to return $38 billion to shareholders this year through buyback programs, according to Bernstein Research, with investment bank RBC Capital Markets’ total figure even higher at $41 billion.

In 2014, when oil was trading above $100/barrel, we only saw $21 billion in buybacks. This year’s figure easily surpassed that of 2008.

But there’s another interesting thing: Oil majors’ capex and production are largely flat despite reports Record second-quarter profit.

Data from the U.S. Energy Information Administration (EIA) showed that major oil companies mostly lowered capital spending and production for the second quarter. An EIA review of 53 U.S. gas and oil companies, which account for about 34% of domestic production, showed a 5% drop in capital expenditures in the second quarter compared with the first quarter of this year.

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cheap energy stocks

Another surprising finding: Despite the big gains, energy stocks are still cheap. Not only is the sector generally outperforming the market, but companies within the sector remain relatively cheap, undervalued, and have above-average expected earnings growth.

Image Credit: Zacks Investment Research

Some of the cheapest oil and gas stocks right now include: Ovintiv (NYSE: OVV) has a P/E ratio of 6.09; Urban Resources Corporation (NYSE: CIVI) has a P/E ratio of 4.87, Enerplus (NYSE: ERF ) (TSX: ERF ) has a P/E ratio of 5.80, western petroleum corp. (NYSE: OXY) has a P/E ratio of 7.09, while canadian natural resources ltd. (NYSE:CNQ) has a P/E ratio of 6.79.

Written by Alex Kimani for Oilprice.com

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