Energy Stocks Soar to Record as Oil Rises on Trump’s Hard Line
(Bloomberg) -- Energy stocks are closing in on record levels reached earlier this year amid the Middle East war as investors see diminishing prospects for a near-term ceasefire that could ease the standoff in the crucial Strait of Hormuz.
The S&P 500 Energy Sector Index climbed as much as 1.8% on Tuesday. If the gains hold through the close of trading, the gauge would close at an all-time high, the first since March 27.
Energy stocks fell 16% from that peak by early July, after a short-lived end to hostilities and news of US-Iran negotiations. But as a ceasefire remained elusive, the stocks have been climbing back steadily toward those highs, and are now up 20% from the low touched on July 1.
“I think a lot of investors missed the rise of energy stocks the first time,” Rob Thummel, senior portfolio manager at Tortoise Capital, said in an interview. “They didn’t want to miss it the second time and recognize that we still have a lot of geopolitical risk in the world and oil prices maybe they’ll go lower, maybe they won’t, but regardless, energy stocks are really important.”
Energy stocks have risen as Brent crude futures climbed around 50% this year amid Middle East supply constraints caused by the war. The higher prices have also translated into stronger earnings and cash flow for major US producers. Chevron Corp. saw second-quarter earnings per share grow by more than 240% year over year, while ExxonMobil Holdings Corp. saw earnings increase 115% when the companies reported quarterly results in July. Chevron is also expected to generate around $12.5 billion in additional free cash flow by 2026.
“There’s a lot of free cash flow coming out of these companies, and it’s not just because the oil price is high, it’s because, they’re performing on all levels. In some cases, they’ve bought back stock, which helps improve their free cash flow per share, in a lot of cases, they’ve maintained their operations or improved their business operations,” Thummel said.
Producers aren’t the only companies benefiting from the supply shortage. Valero Energy Corp. reported its most profitable quarter on record in July as measured by earnings per share, while PBF Energy Inc. and HF Sinclair Corp. reported their best profits in years.
With earnings rising and supply constraints for products such as diesel and jet fuel potentially lasting for years, Melius Research analyst James West sees energy stocks as attractively valued.
“The market is pricing in a somewhat structurally higher oil price environment going forward and a product environment that’s going to be higher going forward,” West said in an interview. “I think these stocks can all trade much higher from here from a market perspective.”
Energy companies could see slower earnings growth if commodity prices pull back, but investors aren’t expecting their shares to suffer declines as steep as the last selloff if a ceasefire is reached.
“I don’t think we’ll see the same type of selloff,” West said. “I think the market now understands that an MOU or a ceasefire and the chances of that holding are pretty limited.”
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