Energy outperforms overall market for first time in five years

Divesting from oil and gas has been a profitable trade for the last couple of years. Now, for the first time since 2016, investors who held on to energy shares are poised to outperform the broader market.

Oil and gas stocks have been the top market performers across North America even as the world ramps up efforts to curb its reliance on fossil fuels.

In New York, the S&P 500 Energy Index has outperformed the broader S&P 500 by 21 percentage points so far this year, with the top performing stock, Devon Energy Corp., gaining a whopping 161 per cent.

Energy stocks beat even the 47 per cent increase in West Texas Intermediate benchmark oil prices, which was trading at about US$73.55 per barrel on Thursday.

In comparison, the S&P 500 Ex-energy Index, which measures the broader U.S. market without oil and gas companies, underperformed the S&P 500 Energy Index by 22 percentage points.

Proshares launched an ETF in 2015 to emulate the ex-energy index.

All of that is somewhat of a vindication for dedicated energy funds, which bet on energy companies' ability to offset changing investor preferences by rewarding shareholders with dividend hikes and aggressive share buyback programs as commodity prices rose. And it's not over, some say. “There's a massive appetite to invest in it because it's just spewing out cash right now,” said Rafi Tahmazian, partner and senior portfolio manager with Canoe Financial in Calgary.

Tahmazian's energy producer-focused fund is up 91.2 per cent year to date, a performance that beat the S&P/TSX Capped Energy Index by 19 percentage points.

The futures curve for WTI shows traders expect oil prices will correct to the Us$66-per-barrel range midyear 2022 and US$65 per barrel at the end of the year. Still, Tahmazian said energy companies have paid down debt this year to the point they can continue to be profitable with lower crude pricing.

In Canada, where energy is a larger part of the country's S&P/ TSX Composite index, with a 12.5 per cent weighting versus 2.66 per cent on the S&P 500, the divergence between the performance of energy funds and ex-energy funds relative to the benchmark is even greater.

The S&P/TSX Capped Energy Index has returned 75 per cent so far this year, compared to 20 per cent for the S&P/TSX Composite Index.

SHANNON STAPLETON/REUTERS/FILE PHOTO After many years in the doldrums, shares in oil and gas companies in both Canada and the United States have bounced back, boosting dividends for shareholders.