Hmm… Wall Street is hiding a secret from you. secret? In 2024, big oil will overtake big tech.
Energy stocks ended 2023 in losses as the broader market soared, but started 2024 with sharp gains, outperforming broader tech indexes this year.
How energy investors keep winning
of Energy Select Sector SPDR Fund (XLE) rose over 13% in the first quarter of 2024, while the Nasdaq 100 Index ($IUXX) rose only 8.7%. XLE is up 16.4% since the beginning of the year, while the tech-heavy Nasdaq 100 is up just under 7%.
Adding to this outperformance is the fact that major oil companies pay out large sums of money to shareholders through dividends. In fact, the oil giant returned more cash to shareholders than ever before in 2023, as management curbed spending on new projects to free up funds for dividends and stock buybacks.
exxon mobil (XOM), Chevron (CVX), Total Energy SE (TTE), BP PLC (BP)and Shell PLC (SHEL) Despite low oil prices, the company spent $113.8 billion in dividends and share buybacks in 2023. The payments were more than 10% higher than the previous year, when Russia's invasion of Ukraine boosted oil prices and oil industry profits.
Returns to shareholders in 2023 were 76% higher than the average dividend from 2011 to 2014, the industry's heyday when crude oil (CLK24) was more than $100 per barrel.
Why energy stocks?
Energy stock valuations continue to trade at historic discounts to the S&P 500 Index (SPX), making energy the cheapest sector on the market.Market capitalization of semiconductor and artificial intelligence (AI) superpowers Nvidia (NVDA) That alone is bigger than the entire energy sector.
There's a certain irony here, in that the data centers behind AI are energy-hungry. It seems like hardly a day goes by without predictions that AI will significantly increase U.S. electricity consumption.
Logic says you can't make AI long and energy short, but that's what Wall Street is doing right now.
It is interesting to compare the energy sector's share of the S&P 500's expected earnings with its weight within the index. As of the end of 2019, both were tied at about 4% each. But now the energy sector's share of profits has jumped to nearly 7%, and it accounts for less than 4% of the index.
The last time we saw such a gap was in the run-up to 2014. Oil prices were above $100 a barrel and poised to fall with profits. Additionally, companies were overspending. Now, with oil prices once again at around $90 (highest since October), the industry is paying in lieu of spending large amounts of capital.
Of all the supermajors, my favorite is still Shell.
Shell stock looks cheap
Shell (SHEL) was born out of a 1907 partnership between the Netherlands-based Royal Dutch Petroleum and the UK-based Shell Transport and Trading Company. Today, Shell is one of the world's largest integrated oil and gas companies, with operations in more than 70 countries. The company's business is divided into several segments.
The integrated gas business (49% of normalized revenue in 2023) focuses on liquefied natural gas (LNG) for transportation to customers around the world. The company is a global LNG leader aiming for sales of 67 million tonnes in 2023, and has the world's largest and most advanced liquefaction/regasification plants in more than 10 countries.
Upstream operations (34%) are primarily involved in exploration and production activities that explore and recover oil and natural gas (NGK24) around the world. Net hydrocarbon reserves are approximately 9.8 billion barrels of oil equivalent (boe), with production in 2022 expected to be 1.1 billion barrels. Most of the reserves (44%) are located in Asia, the remaining 7% in Europe, 12. % in Oceania, 6% in Africa, 16% in North America, and 15% in South America.
The remainder of Shell's revenue comes from its marketing division (11%), chemicals division (13%) and renewable energy solutions (2%).
Ben van Beurden, the company's former CEO, recently said, “The company is significantly undervalued…The current share price is at an all-time high, but it could go much higher than it is now.'' “There is,” he said.
I completely agree with his assessment.
One reason for this is the large valuation gap between U.S. and European oil companies. Let's take a look at the free cash flow yield. By this indicator, Shell is trading over 12% and BP is close to 16%. Meanwhile, Exxon's stock price is just under 7%, and Chevron's is 6.5%. Remember, the higher the yield, the lower the stock's valuation.
Additionally, Shell has sought to increase profitability by selling less productive assets and reducing capital expenditures and operating costs. Free cash flow should improve significantly as the company moves past a period of heavy capital spending and continues to reduce its cost structure. This will provide further impetus for dividend increases and share buybacks. The company increased its dividend by 4% in February and launched a new $3.5 billion share buyback program.
Shell's relatively new CEO, Wael Sawan, is trying to close that valuation gap by sending the right message: profits are prioritized over growth.
Shell is set to benefit from rising global gas demand and higher prices expected over the next decade, as LNG becomes essential to the energy transition. Shell's LNG production will increase by 11 million tons per year by 2030, and by 2030 he will see an increase in LNG volumes of more than 25%.
SHEL stock is a buy at its current price of $72.
As of the date of publication, Tony Daltrio's title was SHEL. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
