Oil stocks are increasingly disconnected from prices | OilPrice.com

Oil stocks have continued to show a clear breakout from the commodity they are tracking, and oil stocks have posted strong gains even as oil prices have fallen since the OPEC meeting. Over the past 30 days, the leading benchmark in the energy industry, Energy Select Sector SPDR Fund (NYSEARCA: XLE ) is up 24.6%, while spot crude oil prices are down 8% over the period. XLE’s return is now 52.9% year-to-date compared to a 20.0% decline S&P 500.

However, there is a method to the madness.

We’re still in the early stages of the 2022 third quarter earnings season, but so far it’s shaping up to be better than feared. According to FactSet earnings informationIn the third quarter of 2022 (20% of S&P 500 companies report actual results), 72% of S&P 500 companies have reported a positive EPS surprise and 70% have reported a positive revenue surprise, both numbers higher than previous forecasts.

The profit margin increased the most in the energy sector compared to the five-year average (14.6% vs. 6.8%). Oil and gas prices have come down from recent highs, but are still much higher than they were in the last couple of years due to continued enthusiasm in energy markets. Indeed, the energy sector remains a huge favorite on Wall Street, with the Zacks Oils and Energy sector being the top performing sector among all 16 Zacks Ranked Sectors.

Unfortunately, the energy sector also leads in one undesirable metric: downward revisions. Downward revisions to revenue estimates for Big Oil companies, incl Chevron Inc. (NYSE: CVX ) from $60.8 billion to $57.4 billion, ConocoPhillips (NYSE: COP ) from $19.8 billion to $18.0 billion, ExxonMobil (NYSE: XOM ) from $106.0 billion to $104.6 billion and Phillips 66 (NYSE: PSX) from $40.5 billion to $39.4 billion have significantly contributed to the decline in the industry’s revenue growth rate. As a result, the energy sector’s combined revenue growth rate has fallen to 32.2 percent from the 35.5 percent forecast just a month ago. According to analysts, most companies in the energy sector are revising their revenue and earnings forecasts downwards, mainly due to the high volatility of the energy market. For example, Shell Oyj (NYSE: SHEL ) recently issued a weak trading update:

“The earnings estimate ($8.2 billion) is 8% below consensus, and we believe gas trade issues in the third quarter could extend into the fourth quarter if the JKM-TTF gap widens again.Jefferies has said. JKM (Japan-Korea Marker) usually acts as a satellite price to the reference price of the most liquid European TTF (Title Transfer Facility) gas concentration. JKM’s liquidity has developed rapidly over the past three years. With the growth of liquidity in spot trading, JKM has been used more and more as a basis for physical trade (both in Asia and beyond) and increasingly as a benchmark for contracts for derivatives (e.g. JKM swaps) and even medium and long-term delivery contracts.

Share buybacks

Fortunately, investors have decided to focus on the bigger picture rather than short-term volatility. In addition, the industry’s result will remain high due to the high number of shares purchased. Oil and gas supermajors are set to buy back shares at near-record levels this year thanks to soaring oil and gas prices, helping them generate bumper profits and boosting returns for investors.

The seven supermajors are poised to return $38 billion to shareholders through buyback programs this year, according to data from Bernstein Research, and investment bank RBC Capital Markets puts the total even higher at $41 billion.

In 2014, when oil traded above $100 per barrel, only $21 billion was bought. This year’s number easily exceeds the number of 2008.

But here’s another interesting thing: Big Oil’s fixed assets and production have remained mostly unchanged despite the reports record second quarter profits.

Data from the U.S. Energy Information Administration (EIA) show that major oil companies mostly cut both capital spending and production in the second quarter. An EIA review of 53 U.S. public gas and oil companies, which account for about 34 percent of domestic production, showed that investment fell 5 percent in the second quarter compared with the first quarter of this year.

Cheap energy storage

Another surprising observation: energy stocks are cheap despite the huge rally. Not only has the sector significantly outperformed the market, but companies in this sector are relatively cheap, undervalued and have above-average forecasted earnings growth.

Image source: Zacks Investment Research

Some of the cheapest oil and gas stocks currently include Ovintiv Inc. (NYSE: OVV ) with a PE ratio of 5.46; Civitas Resources, Inc. (NYSE: CIVI ), with a PE ratio of 4.97, Enerplus Oyj (NYSE: ERF ) (TSX: ERF ) has a PE ratio of 5.84, Occidental Petroleum Corporation (NYSE: OXY ) PE ratio is 6.84 while Canadian Natural Resources Limited (NYSE: CNQ ) has a PE ratio of 6.79.

By Alex Kimani for Oilprice.com

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