5 S&P 500 Energy Stock Winners of a Brutal First Half

Last week, Wall Street posted the worst first half of a year in decades. With market participants concerned that the U.S. central bank’s rate-hiking campaign to fight the persistently high inflation would trigger an eventual recession, the major U.S. equity indices have been caught up in a selloff. In the end, the first six months of 2022 were of immense pain for investors, with the S&P 500 — regarded as one of the finest reflections of the stock market as a whole — tumbling 20.6%, marking its worst first half since 1970.

Energy Stands Tall Amid Carnage

Although the S&P 500 finished the first half deep in the red, a particular group of stocks stood out.

On the sectoral front, it was Oil/Energy that topped the S&P standings for the period with a gain of 29.2%, while all 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 and the geopolitical premium. To be precise, the energy index has continued to move higher this year after comfortably topping the S&P 500 leaderboard in 2021. It has generated a total return of more than 30% in 2022 compared with the S&P 500’s loss of 20%.

The energy market continues to enjoy support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, 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 the European Union following the United States in blocking imports of Russian energy — even at the cost of their economies — the oil bulls are getting a fresh impetus.

While there are jitters over soaring inflation and stuttering economic growth, these have been more than offset by the market’s precariously low level of spare capacity, China’s emergence from its strict COVID-19 restrictions, a stretched-out refining system, plus production disruptions in Libya and Ecuador.

Even the fundamentals point to a tightening of the market. Per the latest government report, U.S. commercial stockpiles have been down some 13% from their five-year average for this time of year, prompted by a demand spike owing to the reopening of economies and a rebound in activity.

Meanwhile, natural gas moved past $9 per million British thermal units (MMBtu). First, a late-season cold and then a quick turnaround to summer heat drove the fuel’s demand load. 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 has become even more coveted, with an increasing number of countries vying for the American-made fuel to replace supplies from Moscow. This means that LNG deliveries are poised to rise further.

While most energy investors have had something to cheer about in the first six months of 2022, some stocks certainly performed better than the others. The five largest contributors to the half yearly gains were Occidental Petroleum OXY, Valero Energy VLO, Hess Corporation HES, ExxonMobil XOM and Halliburton HAL.

Will these winners maintain their run in the remainder of 2022 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. OXY 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 $2.12, above the Zacks Consensus Estimate of $1.97. The company’s bottom line was buoyed by strong operating efficiencies and higher commodity prices.

This stock handily outperformed all other companies and was up 101.2% during the period, ranking first on the S&P 500 list. While Occidental continues to increase production from high-quality asset holdings and benefit from the acquisition of Anadarko, the American multinational appears to have run out of steam. In particular, the Zacks Rank #3 (Hold) company‘s massive long-term debt of around $26 billion and exposure to the volatile commodity prices could limit further share price gains.

Valero Energy: Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean. The majority of VLO’s refining plants are located in the Gulf coast area, from where there is easy access to the export facilities.

In the last reported quarter, Valero reported adjusted earnings of $2.31, beating the Zacks Consensus Estimate of $1.61 per share by 43.5%. The outperformance reflects the company’s increased refinery throughput volumes and a higher refining margin.

This stock was the second-best sector performer on the S&P 500 Index, with shares appreciating 42.4% in the past six months. While there are some apprehensions that Valero may have gotten too far ahead of itself, especially with the prevailing inflationary pressures, the tightness in product demand should keep gasoline margins elevated moving forward. This suggests strong long-term cash flows that should support higher price points for the Zacks Rank #1 (Strong Buy) company‘s shares.

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

Hess Corporation: Hess is a leading global integrated energy company. The company’s E&P activities are concentrated in Denmark, Guyana, Canada, Suriname, the Joint Development Area of Malaysia/Thailand (JDA), Malaysia, and the United States. Additionally, Hess provides gathering, terminaling, loading and transporting operations for both crude oil and NGLs.

In the last reported quarter, Hess reported earnings of $1.30, beating the Zacks Consensus Estimate by 161%. The company’s bottom line was favorably impacted by stronger commodity price realizations.

Hess, carrying a Zacks Rank of 3, rallied 41.9% in the first half of this year. Its slew of discoveries in the Stabroek Block, offshore Guyana, is a big positive catalyst for the company. Over time, Guyana is expected to become one of HES’ major assets with significant cash flow potential. However, the energy operator’s rising costs and expenses, in addition to its relatively high debt-to-capitalization of 53.6%, can affect its financial flexibility. Finally, the dividend yield of Hess compares unfavorably to most of its peers and the S&P 500.

ExxonMobil: ExxonMobil is one of the largest publicly traded oil and gas companies in the world, with operations that span almost every corner of the globe. XOM is fully integrated, meaning it participates in every aspect related to energy — from oil production, to refining and marketing.

ExxonMobil’s first-quarter bottom line came in below expectations due to a decline in oil equivalent production. This was partially offset by higher commodity prices and improved refining margins. XOM reported earnings of $2.07 per share, which missed the Zacks Consensus Estimate of $2.25.

This Zacks Rank #3 stock ended 40.1% higher in the last six months. ExxonMobil's bellwether status and an optimal integrated capital structure that has historically produced industry-leading returns make it a relatively lower-risk energy sector play. With steadily increasing cash flows, XOM recently tripled its stock repurchase program from $10 billion to $30 billion. However, the energy giant’s above-average capital spending program has got investors concerned. Also, the integrated energy major has been witnessing lower oil equivalent production volumes, which might affect the bottom line.

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.

HAL’s first-quarter bottom line came in line with expectations, reflecting stronger-than-expected profit from its Drilling and Evaluation division. Halliburton reported earnings of 35 cents per share, same as the Zacks Consensus Estimate.

This Zacks Rank #3 stock ended 36.7% higher in the January-June period. High commodity prices have increased demand for its services in North America, to which it is heavily exposed. In particular, Halliburton’s key Completion & Production unit margins are likely to improve, with management expecting better pricing leverage going forward. But investors might be put off by its less-than-robust financial position. Halliburton’s long-term debt is currently more than $8.5 billion, with only $2.2 billion in cash and cash equivalents. Moreover, the company's debt-to-capitalization currently stands at 54.8%, which is on the higher side and significantly above the industry's 37.7%.

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