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Energy Stocks Power Ahead on Earnings Gushers

Earnings growth on energy companies is seen topping that on technology stocks.


As investors continue to sift through third-quarter earnings for signs of an economic slowdown, one sector continues to post boom results: energy.

Up more than 63.59% so far in 2022, as tracked by the Morningstar US Energy Index, energy is the only stock sector delivering positive returns this year. High oil prices, high natural gas prices, and high gasoline prices combined with tight cost controls have led to earnings gushers at companies within the sector. Many of them have reported record profits.

According to Morningstar Indexes, the top-performing industry groups through Nov. 1 are all members of the energy sector: oil and gas drilling, up 109.4%; oil and gas integrated, up 73.62%; oil and gas exploration and production, up 76.44%; and oil and gas equipment and services, up 57.90%.

Some market watchers expect the energy gains to continue.

Top-Performing Sector

“If you are a five- to 10-year investor, the number-one sector you have to be looking at is the energy sector,” Richard Bernstein, chief executive and chief investment officer at Richard Bernstein Advisors, told clients during a recent webinar. “The energy sector is the number-one sector for dividend yield, and it’s the number-one sector for long-term secular earnings growth. Its bottom-up projected long-term secular earnings growth is almost twice that of the tech sector.”

“Almost no one is talking about energy as a growth play, everyone talks about tech as a growth story,” said Bernstein. “But if consensus estimates prove right, energy companies will grow earnings at a much faster clip than tech companies over the next five years.”

line chart for Energy sector performance vs. U.S. Market Index

ExxonMobil, Chevron Stock Positioned for Any Cycle

Addressing two of the oil majors, Chevron and ExxonMobil, Morningstar sector strategist Allen Good says strong balance sheets and capital discipline position each “for any cycle.” While both trade at premiums to Good’s fair value estimates, he says, “we see both as preferred plays for continued strength in commodity prices and refining margins compared with their European peers, despite the latter’s more attractive valuations.”

  • ExxonMobil reported record third-quarter earnings of $19.7 billion, or $4.68 a share, and cash flow of $24.4 billion. It increased its dividend payout by nearly 3.5% to $3.64 a share for a yield of 3.26%.
  • Chevron posted third-quarter net income of $11.2 billion, or $5.78 a share, its second-highest quarterly profit ever, and cash flow of $15.3 billion. Its annual dividend is $5.68 a share, yielding 3.18%.

Energy’s Reputation Problem

Despite the excellent returns, this sector has become the one that many investors love to hate. It’s fallen out of favor because of concerns about the environmental impact of its products and amid activist pushes to divest from companies involved in the fossil fuel industry. President Biden recently accused energy companies of “war profiteering” and threatened the industry with higher taxes if energy companies don’t increase production.

Energy’s performance this year compares with a nearly 20% decline in the broader market. The energy sector’s price gains haven’t done much to offset the hefty drops in sectors with higher weights, including tech. Tech is down 34.13% because it represents only 4.6% of the Morningstar US Market Index.

Energy Stocks’ Strong Earnings Performance

At the same time, when it comes to earnings, without the contribution of the energy sector, third-quarter results would also be looking much weaker.

For example, earnings on constituents of the S&P 500 would see a year-over-year decline of 5.1% in the third quarter instead of the gain of 2.2% so far this reporting season, according to John Butters, senior earnings analyst at FactSet. The energy sector, with its earnings gains of $33 billion from the year-ago period, has been the largest contributor to earnings growth in the S&P 500 for the second straight quarter. It is also expected to be the largest contributor to earnings growth for the index for the full year, which is estimated to be up 6.1%. Excluding energy, the S&P 500 is expected to show a 0.06% decline in earnings.

The author or authors own shares in one or more securities mentioned in this article. Find out about Morningstar’s editorial policies.

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