Some investors have begun to view oil and gas stocks as income investing stocks rather than cyclical boom and bust stocks, as many others still believe. Record cash flow and earnings over the past two quarters have prompted many oil and gas companies to increase their dividends or pay out special variable dividends, as is the case for US shale producers. Many others have expanded and increased their stock buyback programs. The record profits and the cash flow windfall could lay the groundwork for more stable dividend payouts to shareholders, some investors believe. But others continue to see the industry as a cyclical business that cuts dividends when oil prices fall.
The question for all investors going forward will be whether the industry will continue to maintain disciplined spending and use its cash flow more to reward shareholders. Oil companies have pledged as much over the past two quarters, seeking to attract investors and pay current shareholders who have stuck with their shares over the past few years. But what will the oil companies do in the next recession? Will they be able to maintain the current policy of rewarding shareholders more? Or will they resort – once again – to cutting or suspending dividends, as they did during the two major oil price crashes of the past decade?
“The industry has seen a permanent transition to a near-high-yield income space,” said Morningstar analyst David Meats. Bloomberg while noting that the almost income-investment profile of oil stocks is unlikely to persist. The current high dividend yields could be seen as a risk premium for investors due to the cyclical nature of stocks, Meats said. Related: OPEC+ production cut looks increasingly likely as producers narrow options
Right now, oil stocks look attractive by some metrics. Analysts say energy stocks are much cheaper than other sectors based on upcoming price-to-earnings (P/E) ratios.
Year-to-date, the energy sector is the best performing sector in the S&P 500 index, according to market data compiled by Yardeni Research.
The S&P 500 energy sector had gained 31.9% year-to-date through September 29. By comparison, the S&P 500 is down 23.6%, and all other sectors have also lost ground since January.
Equity strategists, portfolio managers and retail investors grew increasingly optimistic about energy shares, the latest Bloomberg MLIV Pulse survey conducted in early September shows this.
The survey of 814 respondents, including retail and portfolio investors, risk managers, buy-side and sell-side traders, equity strategists and economists, showed that two-thirds of all respondents had the intention to increase their exposure to energy-related stocks and bonds. over the next six months.
In addition, almost half, or 44%, of respondents say that the current price of oil does not adequately reflect real supply and demand.
Equities could also remain attractive in the medium term, according to some analysts.
“As an average company approaches ‘debt-free’ status by early 2023, its ability to increase shareholder returns in the form of dividends and buybacks could be much greater,” Eric Nuttall, manager of main portfolio at Ninepoint Partners, said this week.
“Even with the rally earlier this year, energy stocks remained cheap and failed to even moderately price oil above $100,” Nuttall added.
Stacey Morris, Head of Energy Research at VettaFi, commented in mid-September on the observation that “energy stocks and oil are decoupling easily”.
“Oil prices usually dictate the direction of energy stocks, but fortunately for energy investors, that has not been the case over the past few weeks. Oil prices have seen three consecutive months of falling prices and are in down more than 30% from their relative high in June, but you might not see that when you look at the performance of energy stocks,” Morris said.
And she asked the million-dollar question: “Are investors finally looking beyond oil price volatility to look at the real merits of energy companies and how they return money? to investors?
By Tsvetana Paraskova for Oilprice.com
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