So far in 2021, oil and gas stocks are far and away the stock market’s top- performing sector. In fact, capital gains alone for the S&P Energy Sector Index and Alerian MLP Index are more than four times the total return on the S&P 500.
Like the previous two, this issue of Energy and Income Advisor focuses on energy companies’ Q1 results and guidance updates. And what we saw is very much a potential driver for more gains this year in the best in class energy stocks we’ve been recommending.
Not only are companies reporting continuing improvement in industry fundamentals. But their numbers—particularly solid dividend coverage and rising levels of free cash flow after distributions—demonstrate management has adapted business plans and financial strategies to the current stage of the energy cycle.
That means, despite reduced production levels and midstream system volumes from a year ago, investors can count on the safety of their dividends. And every month benchmark North American oil prices stay over $50 a barrel, the cushion will grow as above-budget free cash flow is put to work paying off still more debt and buying back stock at discounted prices.
Most encouraging is the fact management teams have stuck to their conservative strategies, even with oil prices at levels almost no one expected when budgets were set in late 2020. North American shale oil producers remain focused on generating free cash flow, rather than pumping up output as they’ve done in the past when prices have risen sharply.
That restraint is probably the biggest change in the energy markets now versus a couple years ago. And it’s an unmistakable sign we’ve entered a new stage of the price cycle, with much higher sector stock prices to come.
Your complete guide to energy investing, from growth stocks to high-yielders.
In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Jul. 27, 2022