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  • Roger S. Conrad

Issues

The Earnings Issue

The Nasdaq 100 has lost about -27 percent of its value so far this year. And the almost as technology-stock heavy S&P 500 isn’t far behind at roughly -18 percent. Throw in the collapse of the bond market—led by a near doubling of the benchmark 10-year Treasury bond yield—and it’s small wonder so many have already proclaimed a bear market is underway.

We won’t argue stocks aren’t due for one, given the last period that really qualified was back in 2007-09. And the worst inflation rate in over 40 years, China’s pandemic lockdowns, the increasingly hawkish Federal Reserve, fallout from Russia’s Ukraine invasion and signs consumer spending is slowing are certainly reasons for worry.

Equally, however, 2022 so far has been among the best of times for energy investors. Led by continuing gains in best in class oil and gas stocks, the S&P Energy Sector Index has returned better than 48 percent. And even sector laggards are revving their engines, with the Philadelphia Stock Exchange Oil Service Sector Index (OSX) higher by nearly 42 percent and the midstream laden Alerian MLP Index returning more than 20 percent.

Energy’s Expanding Winners’ Circle

We’re now roughly two years into the energy upcycle—which began with North American benchmark oil prices actually in negative territory.

For most of that time, it’s paid to focus solely on the very best in class. They were the only energy stocks that were still profitable at the bottom. They were first to adjust to the current environment. And they were able to build market share during the downturn, even while less adept rivals were slashing dividends and filing for bankruptcy.

US/EU Natural Gas Pact and Two New Portfolio Additions

You’ve probably seen the headlines about a deal between the US and European Union aimed at reducing Europe’s dependence on Russian fossil fuels.

One centerpiece of this agreement, unveiled on March 25th, is a US promise to work with international partners to ensure additional liquefied natural gas (LNG) volumes of 15 billion cubic meters (BCM) of natural gas for 2022 with “expected increases going forward.”

So, does this mean a surge in US natural gas prices and increased demand for US liquefied natural gas exports?

Russia and the Next Stage of the Energy Cycle

Earlier this month, global oil prices hit a 13-year high of nearly $140 a barrel. This week, they’ve backed off substantially.

As this issue of Energy and Income Advisor goes to post, Brent crude has dropped back to a level just north of $100. And West Texas Intermediate Crude at the Cushing hub has come back to the mid-$90s.

Energy stocks by and large have lagged the gains in commodity prices thus far in the cycle. But while holding their ground better on the retreat, they’ve also sold off from the highs of earlier this month. The S&P Energy Sector Index, for example, is still up almost 30 percent year to date. But it’s also down more than -10 percent from the high point earlier this month. The Alerian MLP Index of major dividend-paying midstream stocks has also lost about -10 percent of its value from the same date, reducing its 2022 gain so far to about 9 percent.

The Earnings Issue

The highest inflation rate in 40 years, increasingly hawkish global central banks, US/Russian “saber rattling” in Eastern Europe, lingering coronavirus uncertainty, approaching elections: All of these and more have contributed to a shaky opening for stocks this year, with the S&P 500 underwater by -8.6 percent.

The S&P Energy Sector Index, however, has continued to advance since our previous EIA issue and is now up nearly 23 percent for 2022. And while midstream continues to generally lag producers, refiners and other energy stocks, the Alerian MLP Index is still ahead by about 13 percent.

Bottom line is energy’s outperformance in 2021 is so far powerfully carrying over to 2022. And the simple explanation is the sector has decidedly entered a cyclical uptrend—one that based on what we’re seeing so far could be as explosive as any that have preceded it to date.

Q4 Earnings Bellwethers: What They Say About 2022

January performance proved to be a remarkably poor forecaster of full-year returns in 2021, as a small loss that month turned into a monster 28.5 percent gain. Investors can only hope for the same in 2022 with the S&P down around -9 percent year to date.

Energy stocks have so far been notable exceptions. The S&P 500 Energy Sector Index up nearly 18 percent year to date. And even long-suffering midstream energy stocks are higher, with the Alerian MLP Index’ value rising more than 9 percent even without including the massive dividends this group pays.

Six Great Energy Picks for 2022

For energy investors, 2021 will go down as one of the best ever. Benchmark North American crude oil started the year priced well under $50 a barrel but finished at around $77, after spending much of it over $80. Natural gas went from under $2.50 per million BTUs to nearly $6.50, before settling at $3.76.

More than anything else, the commodities’ strength was responsible for lifting the S&P 500 Energy Index and Alerian MLP Index to memorable gains of 53.6 and 39.1 percent, respectively. And as we highlight throughout this issue, a well-chosen portfolio of individual energy stocks did even better.

Wise stock picking in energy mattered just as much in 2021 with the cycle turning higher as it has the past several years when the downside prevailed. And the same will be true in 2022 as the cycle enters its next phase.

For Big Returns Our Focus is on the Energy Cycle

“Reducing coal consumption is an incremental process.” That’s how China’s Foreign Ministry spokesman put it, explaining the change in the COP26 Climate Summit’s language for coal from “phase out” to “phase down.”

Without a doubt, support for de-carbonizing energy has never been greater on the part of governments, investors and industry. But oil, natural gas and coal also currently provide more than 80 percent of the world’s still-rising energy needs.

Even “phasing down” is going to take decades, trillions of dollars of investment and some major technological advances. And so long as the world relies on fossil fuels—as it almost certainly will for decades—whatever discourages investment in them will drive up prices.

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  • Live Chat with

    Elliott and Roger on May. 25, 2022

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Producers and Drillers

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLPs and Midstream

      Our assessment of every energy-related master limited partnership.

    • International Coverage

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.

    Experts

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor