Oil Stocks Are Displaying An Odd Disconnection From Crude Price Movements.

Oil stocks have rallied despite oil prices falling substantially since the last OPEC summit. The Energy Select Sector SPDR Fund (NYSEARCA: XLE) has risen 34% in two months while average crude spot prices have fallen 18%. The top U.S. market sector year-to-date return is 61.2% for XLE.

According to Bespoke Investment Group through the Wall Street Journal, the present divide marks the first time since 2006 that the oil and gas sector has traded within 3% of a 52-week high while the WTI price fell more than 25%. Only the fifth such discrepancy since 1990.

Over the previous two months, Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), Phillips 66 (NYSE: PSX), and Marathon Petroleum Corp. (NYSE: MPC) have all risen 35.3%, 30.6%, 30.1%, 45.3%, and 40.3%, respectively. All stocks except COP are up over the prior five trading sessions. Energy companies’ strong results keep investors buying oil equities.

Third quarter earnings season is nearly done, but thus far it’s shaping up to be better-than-feared. According to FactSet’s earnings analytics, 94% of S&P 500 firms have reported Q3 2022 earnings, with 69% reporting a positive EPS surprise and 71% a positive revenue surprise. Energy saw 137.3% profit growth, compared to 2.2% for the S&P 500. Oil & Gas Refining & Marketing (302%), Integrated Oil & Gas (138%), Exploration & Production (107%), Equipment & Services (91%), and Storage & Transportation (21%), all recorded year-over-year earnings growth. Most energy companies beat Wall Street projections at 81%. Marathon Petroleum ($47.2 billion vs. $35.8 billion), Exxon Mobil ($112.1 billion vs. $104.6 billion), Chevron ($66.6 billion vs. $57.4 billion), Valero Energy ($42.3 billion vs. $40.1 billion), and Phillips 66 ($43.4 billion vs. $39.3 billion) also reported favorable revenue surprises.

Energy is still looking good. In 2023, industry earnings will stabilize but remain below recent peaks, according to Moody’s study.

The analysts expect commodity prices to remain cyclically strong through 2023, despite a fall from early 2022 highs. This, combined with modest growth in volumes, will ensure good cash flow generation for oil and gas companies. Moody’s predicts the U.S. energy sector’s 2022 EBITDA will be $623B and $585B in 2023.

However, low capex, increased supply uncertainty, and high geopolitical risk premium will underpin cyclically high oil prices, economists say. Meanwhile, strong export demand for U.S. LNG will continue sustaining high natural gas prices.

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In other words, there simply aren’t better areas for those investing in the U.S. stock market to lodge their money if they are hoping for real earnings growth. Sector prospects remain positive.

Oil and gas prices have fallen from recent highs, but they are still significantly higher than they were two years ago, which keeps energy markets excited. The Zacks Oils and Energy sector is the highest-ranked of all 16 Zacks Ranked Sectors, proving that Wall Street loves energy.

Further, earnings in the industry are projected to continue high due to high levels of share buybacks. Due to rising oil and gas prices, oil and gas supermajors will repurchase their shares at near-record levels this year.

Bernstein Research expects the seven supermajors to return $38bn to shareholders through repurchase programs this year, while RBC Capital Markets estimates $41bn.

In 2014, when oil was trading over $100/barrel, we only saw $21 billion in buybacks. This year’s figure easily outpaces the 2008 number.

Another noteworthy thing: Big Oil’s investment and production have remained essentially steady despite record second-quarter profits.

Big Oil firms reduced capital spending and production in the second quarter, according to EIA data. An EIA examination of 53 public U.S. gas and oil companies, responsible for 34% of domestic output, indicated a 5% reduction in capital expenditures in Q2 compared to Q1.

Another surprise: energy stocks are inexpensive despite the enormous runup. The sector has outperformed the market and features cheap, undervalued companies with above-average earnings growth.

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