Bringing the Energy

August 4, 2022

Source: FactSet      Source: FactSet

The NFL season is quickly approaching. As training camp begins across the country, we can imagine fields full of football players working hard, sweating and giving their all to prepare for the season. As the days of training camp wear on and the players get tired, a coach might yell, “Bring the energy!” in an attempt to will a player to give even more effort.      

Today in the markets, while many sectors from an earnings standpoint are showing signs of weakness and exhaustion, one sector in particular is standing tall. The much-maligned energy sector is literally keeping the entire market afloat from a year-over-year earnings growth standpoint. The turnaround from negative oil prices and staggering losses during the depths of COVID-19 to massive sales, net income and free-cash-flow gains has been truly impressive.

The surging popularity of ESG investing over the past handful of years has created a negative tone surrounding fossil fuels and other types of energy sources, limiting funding and restraining capacity for companies in this sector. As a result, as oil and natural gas prices have risen, the pricing power of energy companies is near an all-time high.      

This is clearly evident in the profit margins and free cash flows coming from this sector. According to Bloomberg, the “Big Oil” companies — Exxon, Chevron, Shell, Total and BP — are expected to produce record profits: nearly $50 billion in the second quarter alone. Further, Exxon just overtook Alphabet in corporate free cash flow for the first time in four years. Finally, 28 independent oil producers just combined to generate over $25 billion in free cash during the past three months and are expected to generate nearly $100 billion for the full year — overcoming nearly all of the losses incurred through the pandemic-induced decline.

So, as the economy is slowing in other areas and many sectors — namely financials, consumer discretionary, communications services and utilities — are producing negative earnings growth, the energy sector is offsetting all of this underlying economic weakness to keep the overall earnings growth for the S&P 500 Index in positive territory. As our chart of the week shows, the energy sector is generating triple-digit percentage earnings growth for the second quarter relative to last year.

Key Takeaway

What an incredible past few years we have experienced in the investment markets — particularly in the energy sector. The swings in economic and earnings cycles have been extremely sharp, along with being increasingly inconsistent and unpredictable. As a bottom-up stock and bond picker, I strive to select what I believe is the best collection of companies to build a portfolio that can perform well in any environment. I attempt to ignore the big-picture noise related to the talk of recession, bear markets, Federal Reserve moves, etc. and instead focus on fundamentals like earnings, competitive position and balance sheets. Adding value for our clients and shareholders requires us to pay attention to the details that might be overlooked by other market participants, across all sectors.

For example, just focusing on the moves in the broad indexes does not tell the whole story. From a sector and individual security selection standpoint, certain companies may be performing better in this environment and/or positioned for better performance. This is why we stick to our discipline in an effort to identify total return opportunities for each client’s investment objective and portfolio.

Tags: Energy Sector | Earnings | COVID-19 | Value Investing

< Go to Chart of the Week

The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.

This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications