S&P 500's Q1 Energy Winners: Will the Growth Story Continue?
The opening quarter of 2022 brought wild market action and volatility. After robust equity returns during 2021, Wall Street saw a slowdown in the first three months of the year with the S&P 500 — regarded as one of the finest reflections of the stock market as a whole — losing 4.9% for the period. The index’s negative return reflects galloping inflation, the start of a higher interest regime and the resurgence of new coronavirus cases in China.
Energy Emerges as the Star Performer
Despite the S&P 500’s Q1 slump, a particular group of stocks stood out.
On the sectoral front, it was Oil/Energy that topped the S&P standings for the first quarter with a gain of 37.7% while most others lost value. The space has comprehensively outperformed the market, with the Energy Select Sector SPDR’s (an assortment of the largest U.S. energy companies, popularly known by its ticker, XLE) impressive gains fueled by a constructive demand picture besides the geopolitical premium. To be precise, the energy index has generated a total return of nearly 39% in 2022 so far compared with the S&P 500’s loss of 4.1%.
The energy market continues to enjoy support from geopolitical uncertainty amid Russia’s military operations in Ukraine. Last month, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity. The Biden administration’s ban on the import of Russian crude and energy products contributed to oil’s rapid price increase. Agreed, crude has pulled back from those lofty levels but with the conflict showing no signs of a quick resolution and speculation that the European Union could follow the United States in blocking imports of Russian energy — even at the detriment of their economies — is giving fresh impetus to the oil bulls.
Even the fundamentals point to a tightening of the market. Per the latest government report, U.S. commercial stockpiles have been down more than 18% in a year, prompted by the demand spike owing to the reopening of economies and a rebound in activity.
Meanwhile, natural gas moved past $5.50 per million British thermal units (MMBtu). First, a late-season cold is driving the fuel’s heating load demand. Natural gas also remained supported by a stable demand catalyst in the form of continued strong liquefied natural gas (LNG) feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record-high prices of the super-chilled fuel elsewhere. Now, with the Russia-Ukraine conflict, LNG is set to become even more coveted. As a matter of fact, the United States entered into a partnership with the EU recently to export additional LNG to wean the bloc off its dependence on Russian natural gas supplies. This means LNG deliveries are poised to rise further.
The Standout Performers
While most energy investors have had something to cheer about so far in 2022, some stocks certainly performed better than the others. The five largest contributors to the monthly gains were Occidental Petroleum OXY, Halliburton HAL, APA Corporation APA, Marathon Oil MRO and Baker Hughes BKR.
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Will these winners maintain their run in the second quarter too, or will they eventually run out of steam? Here's a summary of them:
Occidental Petroleum: Founded in 1920, Houston, TX-based Occidental Petroleum is an integrated oil and gas company, with significant exploration and production exposure. The company is also a producer of a variety of basic chemicals, petrochemicals, polymers and specialty chemicals.
In the last reported quarter, OXY came up with earnings per share of $1.48, above the Zacks Consensus Estimate of $1.08. The company’s bottom line was buoyed by strong operating efficiencies and higher commodity prices.
This stock outperformed the other companies and was up 96.2% during the period, ranking first on the S&P 500 list. It appears that Occidental will have more room to run up. It continues to increase production from high-quality asset holdings and lower outstanding debts through proceeds from non-core assets sale. The acquisition of Anadarko, investment to strengthen infrastructure and its Permian Basin exposure also continues to boost performance of the Zacks Rank #2 (Buy) company.
Halliburton: Halliburton is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance, and engineering and construction services to the energy, industrial and government sectors.
Halliburton’s fourth-quarter bottom line came in above expectations, reflecting reflects stronger-than-expected profit from its Drilling and Evaluation division. HAL reported adjusted earnings of 36 cents per share, which surpassed the Zacks Consensus Estimate of 34 cents.
This Zacks Rank #2 stock ended 66.2% higher in the last quarter. Halliburton appears well positioned to benefit from the supportive industry fundamentals, which will spur growth in both North American and the overseas markets. HAL seems to be perfectly placed to tap this emerging multi-year upcycle based on its smart strategy, digital leadership and capital efficiency, while aiming for a sustainable energy future.
APA: APA boasts a large geographically diversified reserve base with multi-year trends in reserve replacement. One of the largest oil producers in Permian, the company’s Suriname portfolio is exciting too, where it continues to achieve drilling success.
APA reported fourth-quarter 2021 adjusted earnings of $1.29 per share, missing the Zacks Consensus Estimate of $1.42. The underperformance reflects slightly lower-than-expected production and a rise in costs.
This Zacks Rank #3 (Hold) stock was the third-best sector performer on the S&P 500 Index, with shares appreciating 54.3% in the past three months. The company’s increased focus on the Permian basin, known for its low cost and high internal rates of return, is another key driver. APA’ slew of discoveries in offshore Suriname, through its joint venture with TotalEnergies, is another positive catalyst for the company. However, the energy explorer’s high leverage, significant exposure to forex currency risks and sensitivity to oil price fluctuations could limit share price gains.
Marathon Oil: The upstream energy company’s oil and gas operations are mainly concentrated in the United States (including Oklahoma, Eagle Ford, Bakken and Northern Delaware) and Equatorial Guinea.
In the last reported quarter, Marathon reported adjusted earnings of 77 cents, beating the Zacks Consensus Estimate by 40%. MRO’s bottom line was favorably impacted by stronger liquid realizations and better-than-expected domestic production.
Marathon, carrying a Zacks Rank #1 (Strong Buy), rallied 53.4% in January-March and is poised for further capital appreciation. In particular, MRO’s robust operational metrics suggest strong long-term cash flows that should support higher price points for its shares. The wells drilled by Marathon have extremely low oil price breakeven costs and need oil prices of just $35 a barrel to be profitable. It’s also important to remember that the company’s significant debt maturities will mostly fall after 2025 and as such there does not appear to be much risk here.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Baker Hughes: The company is one of the largest providers of technical products and services to drillers of oil and gas wells.
Baker Hughes delivered underwhelming fourth-quarter 2021 bottom line due to decline in cost productivity in its Digital Solutions segment. The company reported adjusted earnings per share of 25 cents, missing the Zacks Consensus Estimate of 29 cents.
BKR saw its stock surge 52.4% in the first quarter. Baker Hughes should benefit from strong order intake that signals signaling strong growth and profitability in 2022. With the rising demand for clean energy, the company also expects substantial growth from a series of profitable liquefied natural gas contracts globally. But this #3 Ranked oilfield service provider’s near-term stock price appreciation is likely to be under pressure from declining volume in subsea productions systems and lower equipment and project revenues in the Turbomachinery & Process Solutions unit.
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