This Investment Made a LOT of Money in 2022… And It Looks as if There’s More to Come

This Investment Made a LOT of Money in 2022… And It Looks as if There’s More to Come

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Dave Gilbert here, Editor of Smart Money.

One of the defining investing stories of 2022 is the incredible outperformance of energy stocks.

Not only is energy the lone S&P sector (out of 11) that’s even positive for the year, but the outperformance is also staggering…

  • S&P 500: -17%
  • Energy Sector: +68%

If you invested $10,000 in the S&P 500 to start the year, it would now be worth $8,300.

But if you invested $10,000 in the energy sector to start the year, it would now be worth $16,800.

On a dollar basis, we’re talking a 100% difference, which is huge.

A lot of investors seem to think a) it’s too late to make good money in energy now; or b) energy – specifically oil and gas stocks – can’t continue to outperform as the world transitions to renewable and greener sources.

As Eric Fry has said, it’s okay to be bullish on both old and new energy as this transition plays out. And it’s going to take time.

New demand projections for the next 20 years strongly suggest that old energy stocks will continue to make good money for investors, even as new energy stocks continue to grow…

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The Decades-Long Trend Still Points Higher

Simply put, the world needs more energy. Demand continues to grow for all sources, whether they are fossil fuels or renewable energy.

OPEC – officially the Organization of the Petroleum Exporting Countries – recently called for massive investments in oil to boost production to meet what it sees as booming demand for the next 20 years.

To put a dollar amount on it, OPEC says $12.1 trillion is needed to keep up with demand that will boom as developing nations’ economies and populations continue to grow. OPEC expects demand to increase more than 9% by 2025, which is higher than its projections one year ago.

There are two important takeaways from the report.

  1. Demand for oil in wealthier developed nations will eventually begin to taper as the transition to alternative sources unfolds, but OPEC says it will be more than offset by increasing demand in developing countries.
  2. That process will take decades, during which time OPEC expects the predominant sources of global energy will be oil, coal, and natural gas.

Consider also the events of this year in which the Biden administration has tapped into the nation’s Strategic Petroleum Reserves (SPR) to try to offset the surge in gas prices earlier in the year and counter possible supply disruptions in the wake of Russia’s invasion of Ukraine.

The result is an SPR that is now at its lowest level in nearly 40 years. It has shrunk by nearly 200 billion barrels of oil, 33% lower than where it started the year. That will need to be replenished, which only adds to demand and the importance of production.

Keep in mind as well that petroleum is used in all sorts of stuff we use every day, from electronics to textiles to personal care items and household products.

Riding the Bullish Tailwinds

While electric vehicles (EVs) are having a record year and getting the attention right now, much of the world still runs on oil. Yet the world is producing less. As Eric wrote nearly one year ago, this supply/demand imbalance provides a bullish backdrop is too compelling to ignore….

According to Rystad Energy, global investments in oil and gas E&P [exploration and production] have plummeted by about 65% since the 2014 peak.

A chart showing global capital expenditure for oil and gas exploration and production, according to Rystad Energy (dates range from 2010 to 2020, amounts ranging from ~$300 billion to just over $850 billion)

This non-spending creates two bullish tailwinds for oil company stocks:

  1. It will reduce future crude production, which could lead to soaring oil prices.
  2. It will convert the oil sector into a sort of publicly-traded garage sale – an industry that simply sells off what it already owns.

You see, as oil companies slash their spending on exploration and development, their free cash flow will surge. Instead of continuously plowing that cash into future projects, oil companies can drop most of it onto their balance sheets like dollar bills into a shoebox at a garage sale.

Returning to the Rystad Energy data, the world’s oil companies are spending half a trillion dollars fewer per year on E&P than they were in 2014. That’s a big chunk of change, and as this cash piles up, reported earnings will surge – as will the capacity to “return capital” to shareholders.

Those earnings are indeed surging. In the current reporting season, earnings in the Energy sector have grown 137%. Not surprisingly, that leads all 11 sectors and is lifting the whole market’s earnings growth rate from decidedly negative to positive. According to FactSet…

The Energy sector is also the largest contributor to earnings growth for the S&P 500 for the third quarter. If this sector were excluded, the index would be reporting a decline in earnings of 5.3% rather than growth in earnings of 2.2%.

When Eric shared his analysis of oil supply and demand with his Investment Report readers last December, he recommended one specific opportunity that is now up 62%. He continued to recommend opportunities here in 2022, adding eight more related investments that are up 16.3% on average. (Two were just recommended in September.)

Eric summed up the opportunity well with a good old rock n’ roll analogy:

Oil stocks may not be as passe as most folks assume. Like the Rolling Stones, they probably have a few solid performances left in them.

If you’ve seen any of the videos of their summer concerts with 79-year-old Mick Jagger still strutting and running around the stage, you know how enticing that possibility is.



On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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