Energy stocks should pump out more gains
The gusher of rising energy stock prices, which has sent the sector up 66% in 2022 on top of 55% in 2021, may finally be calming down a little. But there’s still plenty of oomph left for volatility-tolerant investors to reap rich profits in energy stocks in 2023.
Global recessions, war and COVID-19 could buffet the sector in the first half of the year, says Darrell Cronk, president of the Wells Fargo Investment Institute. But because he expects energy supplies to struggle to keep up with a likely economic recovery later in the year, his outlook for energy stocks remains bright.
Wells Fargo sees the price of West Texas Intermediate crude finishing 2023 between $100 and $120 a barrel, up from $80 at the end of 2022. Alternative-energy sources aren’t currently growing fast enough to meet demand, so Cronk says the outlook is positive over the long term for legacy energy producers — the companies that find, extract, refine, transport and store oil and gas.
“We are only a couple of years into a multiyear bull supercycle,” he says.
Just don’t expect profits to grow at the torrid pace of the past couple of years.
The consensus forecast of analysts is for energy profits to contract 13% in 2023, following an estimated 152% jump in
2022 compared with 2021, according to FactSet, an investment research firm.
And there are still plenty of bargains. Based on estimated earnings, the energy sector carries the lowest price-earnings ratio of the 11 stock sectors in the S&P 500 index. While the P/E for the overall index is 17.3, stocks in the energy sector recently traded at an average P/E of 9.6 — significantly less than the sector’s long-term historical average P/E of 17.8, according to research firm CFRA.
With those kinds of discounts, “What else are you going to do with your money?” asks energy bull Cole Smead, co-manager for the Smead Value Fund. The fund, whose returns rank it in the top 25% of similar funds for seven of the past 10 years, according to fund-tracker Morningstar, held 23% of its portfolio in oil and gas companies at last report.
Ben Cook, who manages the Hennessy
Midstream Fund, adds that a revolution in the C-suites of energy firms should also support their stock prices. Companies are no longer spending all their profits — and then some — on oil fields, plant and equipment in response to rising oil prices, he says. Now, most are reining in capital spending and instead using cash to reduce debt, raise dividends and buy back stock.
“Total shareholder return has become a more significant priority to management,” Cook says, which could lead to higher P/Es for the shares as investors become willing to pay more for those potential returns.