Hello, Reader.
If you’re familiar with the 1960s sitcom The Beverly Hillbillies, then you’ll remember its kitschy theme song refer to oil as “black gold,” a bubblin’ crude so lucrative that it moved the entire Clampett clan from Missouri to California.
Well, black gold remains just as alluring today.
As we discussed in yesterday’s Smart Money, the energy sector is currently a “multiverse,” focusing on both renewable- and fossil fuel-based energy systems.
And despite the increasing year-by-year deployments of renewable energy, “old energy” deployments are also on the rise, clashing head-on with the “oil is dead” narrative. And, more importantly to our interests, offering their own appealing investment opportunities.
However, most investors overlook legacy energy plays that have been quietly piling up market-beating gains in favor of newer, more exciting industries.
So, in today’s Smart Money, I want to examine the often overshadowed – but far from dormant – oil and gas sector.
And some of the intriguing opportunities it offers…
Uncovering Stealthy Success
The oil and gas sector has been enjoying a subdued “stealth rally” during the last few years. Since the end of 2021, the S&P 500 Energy Sector sub-index has produced a total return of 92% – more than seven times the S&P 500’s return over the same time frame.
Despite this impressive performance, however, oil and gas stock valuations remain close to historic lows. Valero Energy Corp. (VLO) provides a textbook illustration. The shares of this bellwether oil refiner have soared 36% year-to-date, reaching a new all-time high. But even at this record level, the stock is trading for just seven times earnings, which is half its average valuation of the last 30 years.
The chart below presents another example of the energy sector’s relatively low valuations, by comparing ExxonMobil Corp. (XOM) to tech stocks. Using price-to-EBITDA ratios, the chart shows that Exxon’s valuation has fallen to a record-low 70% discount to the valuation of the S&P Information Technology Sector sub-index.
As a result, oil and gas stocks are offering some outstanding opportunities right now, especially if energy prices continue ratcheting higher.
The Crude Comeback
The signs are promising.
In the oil market, for example, the supply-demand balance is becoming unbalanced in favor of demand. Last month, the International Energy Agency (IEA) raised its forecast for 2024 oil demand growth for a fourth time since November. The IEA now expects oil demand to grow to 103 million barrels per day (bpd) in 2024 – or 1.3 million bpd more than 2023 levels.
At the same time, the IEA trimmed its supply forecast to 102.9 million bpd, which would mean that the crude market is shifting into its first annual supply deficit since 2021.
Crude prices seem to have caught a whiff of these shifting supply-demand winds. The benchmark West Texas Intermediate crude price has jumped 25% year-to-date. This robust price action in the oil patch could be the first fruits of a long-term revival… even if electric vehicles catch fire once again… figuratively speaking.
According to a Bernstein Research report from last year, EVs will make up more than three-quarters of the global auto fleet by 2040. But even if that optimistic forecast comes to pass, the report predicts crude demand will soar to a record-high 109.2 million bpd by 2030.
Following that peak, the Bernstein researchers expect demand to drift slowly down to 105.3 million bpd by 2039. If that prediction is on target, oil demand would be higher 15 years from now than it is today.
The likelihood that crude demand will continue soaring for years to come is reason enough for multitrillion-dollar investment to flow into the industry.
Other sources of crude demand are also on the rise. The “sickly” Chinese economy, for example, is consuming a record-high 16 million bpd, which is about 20% more crude than it consumed prior to the pandemic!
Many folks assume that OPEC producers could easily boost output to satisfy any significant surge in demand. But the recent evidence is not very convincing. Production has been declining in many OPEC countries for years, and the cartel’s total output has slumped more than 15% from the peak levels it reached in 2016.
The rising crude price is reflecting these supply-demand trends. Oil stocks also have taken notice.
The bottom line: The evidence positions fossil fuels as a formidable contender in the energy sector.
My Fry’s Investment Report portfolio features nine open positions in oil and gas stocks. As a group, these stocks have produced an average gain of 40%. But I think they still have further to go.
So, to learn more about my favorite oil and gas stocks, learn how to join me at Fry’s Investment Report.
Click here to become a member today.
Regards,
Eric Fry
Editor, Smart Money
P.S. Another natural resource is fueling the energy industry…
A remarkable trillion dollar lithium discovery was made in a deserted area of Nevada.
And there’s still time to capitalize on soaring demand for a resource that’s absolutely critical for the modern economy.
