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5 S&P 500 Energy Stocks That Thrived in a Shaky September

Staying true to history, U.S. equities had a rough time in September. The S&P 500 was down 4.8% last month, while the Dow and the Nasdaq lost about 4.4% and 5.4%, respectively. In particular, the S&P 500 — regarded as one of the finest reflections of the stock market as a whole — not only recorded its worst monthly performance since March last year but also snapped a seven-month streak of gains. The index’s negative return reflects inflation fears, anxiety over a budget deal and sector rotations out of technology and growth stocks.

Energy: The Only Sector in the Green in September

Despite S&P 500’s September slump, a particular group of stocks stood out.

On the sectoral front, it was Oil/Energy that topped the S&P standings for the month of September with a gain of 6.9% while all others lost value. The space has significantly outperformed the market, with the Energy Select Sector SPDR — an assortment of the largest U.S. energy companies, popularly known by its ticker, XLE — rebounding nearly 130% from its lockdown lows in March last year, fueled by a constructive demand picture. To be precise, the energy index has generated a total return of 42% in 2021 so far compared with the S&P 500’s 18.4%.

The market recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world amid a supportive macro backdrop and robust fundamentals. Widespread COVID-19 vaccine rollouts, the ongoing government stimulus, shale players’ conservative approach to production ramp-up and the OPEC+ supply curtailments have contributed to this positive energy setup. Mobility restrictions have been rolled back and most parts of the economy have reopened.

As a matter of fact, domestic crude supplies are now at their lowest levels since October 2018, with U.S. commercial stockpiles down some 18% since mid-March. There is also a marked improvement in fuel demand on the back of rebounding road and airline travel. With all the tailwinds, the U.S. benchmark rose 9.5% in September and hit a three-year high settlement of $75.45 on Monday.

Meanwhile, natural gas moved past $5.80 per million British thermal units (MMBtu) in trading on Thursday to finish the day at $5.867. This was the highest settlement since February 2014. Natural gas saw a monthly gain of 34% and has more than doubled year to date. The impressive rally is the result of slow restoration of hurricane-affected operations, anticipated pre-winter supply crunch and surging consumption in Europe and Asia.

While most energy investors have had something to cheer about in September, some stocks certainly performed better than the others. The five largest contributors to the monthly gains were Cabot Oil & Gas COG, Diamondback Energy FANG, ConocoPhillips COP, Devon Energy DVN and EOG Resources EOG.

Will these winners maintain their run in the fourth quarter too, or will they flop toward the end of the year? Here's a summary of them:

Cabot Oil & Gas: Cabot is an independent gas exploration company, with producing properties mainly in the continental United States. The company owns around 175,000 net acres in the dry gas window of the Marcellus play.

In the last reported quarter, Cabot came out with adjusted earnings per share of 26 cents, below the Zacks Consensus Estimate of 27 cents. The company’s bottom line was affected by lower-than-anticipated production volumes.

This stock outperformed the other companies and was up 36.9% during the period, ranking first on the S&P 500 list. But it appears that there is not much room for an upside as the company’s proposed combination with oil-focused Cimarex Energy XEC has not found many takers. With no acreage overlap, the strategic rationale behind the amalgamation of Zacks Rank #4 (Sell) Cabot (a natural gas operator in the Appalachian Marcellus shale basin) and Cimarex, which primarily drills for oil in the Permian and Anadarko basins, remains vague.

Diamondback Energy: Diamondback Energy focuses on growth through a combination of acquisitions and active drilling in the Permian Basin. Diamondback's leading position in the unconventional play got another leg up with the recently completed takeover of QEP Resources.

Diamondback’s second-quarter bottom line came in above expectations, led by better-than-expected production. The company reported adjusted earnings of $2.40 per share, which surpassed the Zacks Consensus Estimate of $2.25.

This Zacks Rank #3 (Hold) stock ended 22.7% higher in the last month. Diamondback appears well positioned with its low-cost structure and investment-grade balance sheet, which should allow it to thrive in the ongoing commodity upcycle. The company also approved a new share repurchase program worth $2 billion in September. However, as crude accounts for the major part of Diamondback’s reserves and production, the company’s results are vulnerable to fluctuations in oil markets. Its relatively high debt level also remains a cause of worry.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConocoPhillips: Founded in 1875, Houston, TX-based ConocoPhillips is one of the world’s largest independent oil and gas producers. The company holds a bulk of acres in the unconventional plays of North America.

ConocoPhillips reported second-quarter 2021 adjusted earnings of $1.27 per share, comfortably beating the Zacks Consensus Estimate of $1.15. The better-than-expected bottom line could be attributed to increased production volumes due to the Concho Resources acquisition and rising realized commodity prices.

This Zacks Rank #3 stock was the third-best sector performer in the S&P 500 Index, with shares appreciating 22% in the past month. Some of the gains came after ConocoPhillps became the second-largest hydrocarbon producer in the Lower 48 with the $9.5-billion Permian acquisition from Royal Dutch Shell (RDS.A). However, the company’s increasing operating and production expenses could limit share price gains.

Devon Energy: Devon is an independent energy company whose oil and gas operations are mainly concentrated in the onshore areas of North America, primarily in the United States. The company’s assets are spread across the key oil assets of Delaware Basin, Eagle Ford, Anadarko Basin and Powder River Basin.

In the last reported quarter, Devon Energy reported adjusted earnings of 60 cents, beating the Zacks Consensus Estimate of 53 cents per share by 13.21%. The outperformance reflects higher-than-expected production.

Devon, carrying a Zacks Rank #3, rallied 21.8% in September. The company’s recent merger with WPX Energy has strengthened its operations in the prolific Permian Basin. Devon’s cost management, divestiture of Canadian assets, and completion of the Barnett Shale gas assets sale will allow it to focus on its holdings in four high-quality, oil-rich U.S. basins. The company’s innovative dividend policy should also attract investors. However, the stock’s upside will be limited by product cost inflation and the volatility in oil/gas prices.

EOG Resources: EOG Resources is a top-tier U.S. shale play. The United States accounts for more than 92% of the total production volumes, with the Eagle Ford and Delaware Basin being the primary contributors. Internationally, the company has operations in China and Trinidad.

EOG Resources delivered better-than-expected second-quarter 2021 bottom line due to increased commodity prices and production volumes. The company, which pays a special dividend along with a regular dividend, reported adjusted earnings per share of $1.73, beating the Zacks Consensus Estimate of $1.54.

The upstream operator saw its stock surge 18.88% in September. EOG Resources should benefit from its attractive growth profile, a huge inventory of drilling opportunities, upper quartile returns and a disciplined management team. But this #3 Ranked oil and gas finder’s near-term stock price appreciation is likely to be under pressure due to rising lease and well operating costs.

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Devon Energy Corporation (DVN) : Free Stock Analysis Report
ConocoPhillips (COP) : Free Stock Analysis Report
Cabot Oil & Gas Corporation (COG) : Free Stock Analysis Report
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
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