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Energy stocks are on a big run — and still have some catching up to do

By Philip van Doorn

Energy stocks have lagged behind commodities prices as the world economy has rebounded

Energy commodities and stock prices have been heading up, and some professional investors see this as an excellent "contrarian" play for investors right now.

Then again, maybe going with the flow shouldn't be considered contrarian.

Regardless, what matters is your opinion -- do you expect oil and natural gas prices to keep rising as the global economy rebounds from the pandemic? If so, the information below should be encouraging -- energy stock prices have some catching up to do.

So far in 2021, the energy sector of the S&P 500 Index has returned 29% (with dividends reinvested), compared to a 21% return for the full benchmark index.

But even though the energy sector has been a winner this year, a look back shows it has been late to the party. For a perspective from before the COVID-19 pandemic sent U.S. markets cratering, here's a chart comparing the sector's performance since the end of 2019 with the movement of continuous forward contracts for West Texas crude oil and for natural gas :

The stocks have lagged behind the commodities -- it appears some investors aren't entirely convinced that the economic recovery will continue unabated. Natural gas has been on what appears to be an incredible run, accelerating during the disruption of production in the Gulf of Mexico from Hurricane Ida.

Continuing economic growth, especially as we head for winter, bodes well for natural gas demand. It is also worth thinking about the financial media's narrative for energy. Green is good, but most people who drive are still using vehicles that run on gasoline or diesel fuel. Even governments' seemingly harsh measures of phasing out internal combustion engines won't rid the world of hybrids for decades to come.

Then there's the problem of home heating -- millions of people will be using natural gas, as usual, to heat their homes this winter. Then, when you factor in the use case for fossil fuels in heavy transportation and air travel, it seems early to predict an end for fossil fuels.

Before reviewing a list of stocks, here's a 10-year chart, to add some perspective to the more recent action displayed above.

Now the picture for natural gas seems far less rosy, and this year's remarkable runup fits into a dramatic pattern, with the current price well below its highs of 2014.

Energy stocks and partnership units

If you are considering loading up on energy stocks in the hope of riding a continuing bounce for oil or natural gas prices, you are looking for growth. But some investors seek current income, and energy master limited partnerships (MLPs) have been a way to get it.

Most MLPs are focused on energy commodity transportation (mainly pipelines) and storage. The idea is that these "toll takers" have contracts based on the flow of liquids and not on oil and natural gas prices. But that hasn't kept the partnerships' unit prices from tanking during periods of weakness for oil and gas prices.

One disadvantage of MLPs is their tax complications. Since income passes through to the partnership unit holders, investors receive Schedule K-1 tax forms, which are more difficult to use when preparing a tax return than simple 1099-DIV forms received by investors who receive dividends from securities held outside retirement accounts. MLPs can also return capital to investors through the dividends, as reported on the K-1s. These lower the cost basis, which leads to larger capital gains (if there are gains) when the securities are sold.

The MLPs as a group haven't been good performers over the long term. This year, the Alerian MLP ETF (AMLP) (which holds units of 16 MLPs and has a dividend yield of 8.37%, according to FactSet) is up 36% with dividends reinvested. But for 10 years, the total return (with dividends reinvested) for the ETF has been minus 7%. Yes, that's better than the 20% price decline for oil over the past 10 years, but it certainly appears that the high dividend income hasn't done very much to outweigh the risk.

None of this is to say AMLP will fare poorly in the future. That dividend yield is nothing to sneeze at in a world of very low interest rates, and the pipeline partnerships may have their day in the sun.

There are other ways to invest in pipelines and natural gas, while still pursuing income, outside of the MLPs. One example is Williams Cos. (WMB), which has a dividend yield of 6.79% and has returned 26% this year. WMB has returned 17% since the end of 2019 and 101% for 10 years.

Energy stock screen

In order to expand a potential list beyond the 22 energy stocks included in the S&P 500, here is a list of the 30 energy stocks in the Russell 1000 Index , with a summary of opinion among analysts polled by FactSet and performance since the end of 2019:

Company  Industry  Share "buy" ratings  Closing price -- Sept. 9  Cons. price target  Implied 12-month upside potential  Dividend yield  Total return from end of 2019 
Cheniere Energy Inc. LNG  Oil & Gas Pipelines  100%  $87.56  $104.14  19%  1.51%  43% 
ConocoPhillips COP  Oil & Gas Production  97%  $55.58  $75.56  36%  3.09%  -9% 
Diamondback Energy Inc. FANG  Oil & Gas Production  91%  $75.66  $113.73  50%  2.38%  -14% 
Baker Hughes Co. Class A BKR  Oilfield Services/ Equipment  90%  $23.51  $28.20  20%  3.06%  -2% 
Valero Energy Corp. VLO  Oil Refining/ Marketing  86%  $63.54  $83.82  32%  6.17%  -25% 
Devon Energy Corp. DVN  Oil & Gas Production  85%  $28.45  $38.42  35%  4.36%  19% 
Marathon Petroleum Corp. MPC  Oil Refining/ Marketing  84%  $57.25  $70.06  22%  4.05%  4% 
Williams Cos. Inc. WMB  Oil & Gas Pipelines  83%  $24.14  $29.05  20%  6.79%  17% 
Targa Resources Corp. TRGP  Oil Refining/ Marketing  83%  $43.96  $53.43  22%  0.91%  13% 
Pioneer Natural Resources Co. PXD  Oil & Gas Production  81%  $150.30  $207.29  38%  1.49%  4% 
Schlumberger Ltd. SLB  Oilfield Services/ Equipment  80%  $26.62  $35.62  34%  1.88%  -31% 
EOG Resources Inc. EOG  Oil & Gas Production  70%  $67.35  $98.95  47%  2.45%  -15% 
Phillips 66 PSX  Oil Refining/ Marketing  70%  $66.74  $90.24  35%  5.39%  -35% 
EQT Corp. EQT  Oil & Gas Production  70%  $19.87  $26.80  35%  0.00%  83% 
Halliburton Co. HAL  Oilfield Services/ Equipment  69%  $19.32  $26.31  36%  0.93%  -19% 
DT Midstream Inc. DTM  Oil & Gas Pipelines  67%  $46.34  $50.00  8%  5.18%  N/A 
Chevron Corp. CVX  Integrated Oil  63%  $96.00  $124.31  29%  5.58%  -12% 
Hess Corp. HES  Oil & Gas Production  61%  $68.58  $99.64  45%  1.46%  6% 
Cimarex Energy Co. XEC  Oil & Gas Production  54%  $74.10  $88.00  19%  1.46%  47% 
NOV Inc. NOV  Oilfield Services/ Equipment  54%  $12.72  $17.23  35%  0.00%  -49% 
Marathon Oil Corp. MRO  Oil & Gas Production  52%  $11.35  $15.89  40%  1.32%  -15% 
APA Corp. APA  Integrated Oil  40%  $18.93  $27.80  47%  0.53%  -25% 
Cabot Oil & Gas Corp. COG  Integrated Oil  39%  $18.53  $21.32  15%  2.37%  11% 
Occidental Petroleum Corp. OXY  Oil & Gas Production  38%  $25.07  $34.52  38%  0.16%  -35% 
HollyFrontier Corp. HFC  Oil Refining/ Marketing  35%  $29.94  $37.54  25%  0.00%  -37% 
Exxon Mobil Corp. XOM  Integrated Oil  33%  $54.09  $67.11  24%  6.43%  -12% 
Continental Resources Inc. CLR  Oil & Gas Production  31%  $37.45  $40.30  8%  1.39%  10% 
Kinder Morgan Inc. Class P KMI  Oil & Gas Pipelines  30%  $15.98  $18.76  17%  6.76%  -15% 
ONEOK Inc. OKE  Oil & Gas Pipelines  29%  $52.40  $56.45  8%  7.14%  -18% 
Antero Midstream Corp. AM  Oil & Gas Pipelines  0%  $10.00  $9.28  -7%  9.00%  80% 
Source: FactSet 

Click on the tickers for more about each company. Here is a new guide to the MarketWatch quote page, which includes a wealth of information.

The list is sorted by percentage of "buy" or equivalent ratings among analysts polled by FactSet. Cheniere Energy Inc. (LNG) tops the list with 100% "buy" ratings and it has also been the best performer among the listed stocks over the past 10 years, with a return of 1,149%. Cheniere is a leading player in the liquified natural gas industry, shipping worldwide through terminals in Louisiana and Texas.

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-Philip van Doorn

 

(END) Dow Jones Newswires

09-11-21 1012ET

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