Energy: Flows Leaving Hormuz Accelerate, but That’ll Change as War Resumes
Our top picks in the sector include Antero and Baker Hughes.
The third quarter of 2026 saw the Morningstar US Energy Index as the best-performing sector index, following marked underperformance in the second. That outperformance stemmed from oil prices, which climbed following an escalation of hostilities between the United States and Iran.
After a Brief Truce, Energy Stocks Rally as War Tensions Flare
Flows through the Strait of Hormuz are resuming, but the recovery will extend into 2027 as the US and Iran resume armed conflict. The countries remain far apart on key issues, including nuclear disarmament, sanctions, and potential tolling on volumes passing through the Strait. Flows through Hormuz rose during mid-August, as missing a large carrier turning off its transponder can meaningfully revise estimates, but that’ll start to change. China is the swing consumer and has halted stockpiling and begun using reserves. Longer-term, we could still see potential oversupply, which could lead to discounts for patient investors.
The Sector Looks Slightly Overvalued, Though Gas Names Look Cheap
We were wrong that the political attractiveness of an offramp would end hostilities. We now expect a protracted stalemate before a gradual recovery. Neither the US nor Iran seem forced to make broad concessions. Sanctions hurt Iran, but it’s managed to navigate through economic isolation well.
Production gains have mostly come by way of continued capital efficiency gains and improved well recoveries. More production hasn’t always led to higher drilling levels. But some have started drilling in the Permian. Diamondback and Conoco have each added rigs; only Diamondback has called out higher prices as the driver.
Higher Oil Rigs Mostly Permian-Driven and Mostly from a Subset of Producers
US dry gas production may reach 115 billion cubic feet per day and may exceed 120 Bcf/d, despite lower gas prices. The Haynesville is now the swing producer, as we’ve highlighted in “The Future of US Gas.” We think growing demand from LNG and data centers will push prices higher and continue to incentivize drilling, especially as drilled but uncompleted wells dwindle.
Gas Rigs Continue to Rise, Driven by Haynesville Activity
Top Energy Sector Picks
Baker Hughes BKR
- Fair Value Estimate: $73.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: None
- Morningstar Uncertainty Rating: Medium
Disappointing guidance on the Chart acquisition and a lack of market appreciation for the LNG and data center runway create the discount. We think the firm’s record industrial backlog, expanding book-to-bill ratios, dominance in LNG liquefaction equipment, and execution record all support meaningful upside.
Expand Energy EXE
- Fair Value Estimate: $144.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: None
- Morningstar Uncertainty Rating: High
This Haynesville gas producer sits close to and enjoys direct access to US Gulf Coast infrastructure, Louisiana LNG facilities, and data center builds. We expect it should benefit disproportionately when LNG demand ramps up and gas prices recover, as Permian supply can’t meet long-term demand.
Antero Resources AR
- Fair Value Estimate: $52.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: None
- Morningstar Uncertainty Rating: High
We think Antero should benefit from soaring overseas demand for US natural gas, while its hedge book offsets near-term price volatility. Over the medium term, it will be shedding less lucrative transport routes, improving its cost structure. Antero also benefits from robust overseas petrochemical demand for NGLs.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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