Energy: US-Iran Peace Deal Signals Long-Term Drivers Should Prevail

The Morningstar US Energy Index fell 13.19% relative to the US Equity Index’s performance of 15.52%. In the first quarter of 2026, energy was the best-performing sector index, but that flipped in the second quarter. The underperformance stemmed from oil prices, which declined due to the United States and Iran agreeing to end hostilities. Rapid oil price declines support our view that the conflict only caused a logistical bottleneck in the Strait of Hormuz.

Oil price declines aren’t merely a repricing of fears, meaning we think the market has repriced oil as if flows were temporarily disrupted. Most industry observers pegged lost oil volumes well over 10 million barrels per day, but traders pegged this figure far lower, between 5-6 mmb/d. Aside from diverting oil through pipelines, some volumes were trafficked, which could account for the disconnect between industry figures. Also, the US and allies drew on strategic reserves, and the US ramped up its exports. Asia cut back its oil consumption, buoyed by China’s prior stockpiling efforts. Nevertheless, we don’t expect the recovery in lost oil volumes to be linear. Naval mines will need to be cleared from the Strait to restore shipping confidence. Other issues include control of the Strait and whether tolls will be imposed.

We’ve repeatedly contended that US shale is far more capital-disciplined now; last quarter’s data supported our long-held view. Despite oil prices rising sharply higher from the Iran war, US shale producers weren’t fooled into drilling meaningfully more new wells. Instead, they exercised caution, prudently deploying additional rigs. Rather than allocating capital toward variable dividends, as we suspected, most producers strengthened their balance sheets by building cash or paying down debt during the quarter.

Top Energy Sector Picks

Devon Energy DVN

• Fair Value Estimate: $55.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

This US shale producer closed its merger with Coterra. Bears frown on its multi-basin, multi-resource story, but Devon’s gas exposure should help it long-term, and we like the upside from the deal’s cost savings, as well as management’s execution and capital return record. We think the merged firm can achieve 70% of these planned savings, driven by longer drilling across adjacent acreage and lower corporate overhead. Upside risk comes from Devon-Coterra selling some of its assets, executing more cost savings than we’re expecting, and either buying more attractive assets or returning cash to shareholders.

Energy Transfer ET

• Fair Value Estimate: $24.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

We see Energy Transfer as our only undervalued midstream that also offers an attractive 7% yield. We like its exposure to data center power facilities and LNG export terminals. Its intrastate pipeline network in Texas is ideal for transporting gas from oil wells to local power plants that feed data centers. After increasing its Desert Southwest pipeline connecting its Texas and Arizona markets, Energy Transfer can now serve its end market more efficiently over competitors.

Antero Resources AR

• Fair Value Estimate: $42.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

Antero’s long-haul transport contracts give it priority access to LNG export pricing; so, it should benefit from soaring overseas demand for US natural gas, while its hedge book offsets near-term price volatility. The acquisition of HG Energy allowed Antero to sell out of its Utica position, doubling down on its acreage in the Marcellus shale. In the coming years, we expect Antero to further augment its gas position by renegotiating its committed long-haul transportation agreements signed over a decade ago.