Back to top

Image: Bigstock

Top 5 Picks From S&P 500's Best Performing Sector Year to Date

Read MoreHide Full Article

U.S. stock markets are in negative territory year to date despite last week’s impressive rally. Most of the sectors are suffering from soaring inflationary pressures, global supply-chain disruptions and a higher interest rate regime. A notable exception is the energy sector, especially the crude oil industry. This sector has flourished in 2022 so far after completing an impressive 2021.

The sector is likely to maintain its momentum in the near term, buoyed by several positives discussed below. At this stage, it will be prudent to invest in oil giants with a favorable Zacks Rank. Five of them are — Exxon Mobil Corp. (XOM - Free Report) , Chevron Corp. (CVX - Free Report) , Devon Energy Corp. (DVN - Free Report) , ConocoPhillips (COP - Free Report) and Marathon Oil Corp. (MRO - Free Report) .

Energy Sector Thrives

Despite severe volatility, the oil and energy sector has flourished so far. This sector suffered a bloody blow in 2020 as the global outbreak of coronavirus forced the whole world to impose lockdowns especially travel restrictions. As a result, oil prices plunged to historic low levels.

However, the situation started taking a positive turn once the global economies, especially the United States, started reopening. Nationwide deployment of COVID-19 vaccines resulted in a faster-than-expected reopening. Strong demand for crude oil — as travel restrictions were removed — resulted in soaring oil prices.

The decision by OPEC to maintain production quota also resulted in a demand-supply imbalance resulting in the northbound movement of oil price. Moreover, the month-long geopolitical conflict between Russia and Ukraine pushed oil prices to a 2-year high.

On Mar 23, the U.S. benchmark — the West Texas Intermediate Crude (WTI) — surged 5.2% to settle at $114.93 per barrel. The global benchmark — the Brent crude — advanced 5.3% to settle at $121.60 per barrel.

The Energy Select Sector SPDR (XLE - Free Report) , one of the 11 broad sectors of the benchmark S&P 500 Index, has appreciated 38.5% year over year and is the only sector trading in green so far in 2022. The S&P 500 Index itself is down 5.3% year to date. Notably, in 2021, XLE had jumped 53.3% and become the best performer on the S&P 500 Index.

Future Catalysts

Oil and gas production is expected to increase further as upstream energy companies are likely to add more rigs. This will likely boost the demand for pipeline and storage assets since more commodities will be needed to be transported and stored. The midstream business has lower exposure to commodity price volatility since shippers generally book pipeline assets for the long term, thereby generating stable fee-based revenues.

Almost all countries have removed coronavirus-led restrictions for travel, office work, visiting shopping mall, watching sports and entertainment programs on grounds or theaters and socializing. Consequently, the demand for gasoline, diesel fuel and jet fuel will increase.

Our Top Picks

We have narrowed our search to five oil bigwigs that have popped year to date. These stocks have strong growth ;potential for 2022 and have seen positive earnings estimate revisions in the last 30 days. These companies are regular dividend payers that will act as an income stream in the market’s downtrend. Finally, each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Exxon Mobil made multiple world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. XOM raised the estimate for discovered recoverable resources from the Stabroek Block to approximately 10 billion oil-equivalent barrels. The WTI crude oil price is hovering well above $100 per barrel. The price is likely to remain elevated as the Russia-Ukraine clash has intensified.

Exxon Mobil’s bellwether status and an optimal integrated capital structure, which have historically led to industry-leading returns make it a relatively lower-risk energy sector play. The integrated oil behemoth expects to reduce greenhouse gas emissions by 30% in its upstream business. By the same time, XOM expects to reduce flaring and methane emissions by 40%.

Exxon Mobil has an expected earnings growth rate of 41.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 10.9% over the last 30 days. XOM has a current dividend yield of 4.3%. The stock price has rallied 35.9% year to date.

Chevron is one of the best-placed global integrated oil firms to achieve a sustainable production ramp-up. CVX’s existing project pipeline is one of the best in the industry, thanks to its premier position in the lucrative Permian Basin. The WTI crude oil price is hovering well above $100 per barrel. The price is likely to remain elevated as the Russia-Ukraine conflict has intensified.

Chevron’s Noble Energy takeover has expanded its footprint in the region and the DJ Basin. CVX now has access to Noble Energy’s low-cost, proven reserves along with cash-generating offshore assets in Israel — particularly the flagship Leviathan natural gas project — thereby boosting its footing in the Mediterranean.

Chevron has an expected earnings growth rate of 57.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 15.5% over the last 30 days. CVX has a current dividend yield of 3.5%. The stock price has climbed 41.3% year to date.

ConocoPhillips holds a bulk of acres in the three big unconventional plays, namely Eagle Ford shale, Delaware basin and Bakken shale, which are rich in oil. COP also has a foothold in Canada’s oil sand resources and exposure to developments related to liquefied natural gas.

ConocoPhillips announced an agreement to purchase all Royal Dutch Shell assets in the prolific Permian. The deal reflects COP’s aim of broadening its Permian presence. The transaction is highly accretive and involves the acquisition of roughly 225,000 net acres in the heart of the core Delaware basin.

ConocoPhillips has an expected earnings growth rate of 62.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 13.4% over the last 30 days. COP has a current dividend yield of 1.8%. The stock price has jumped 44.6% year to date.

Marathon Oil is a leading oil and natural gas exploration and production company with operations in the United States and Africa. MRO’s robust operational metrics suggest strong long-term cash flows that should support a higher price for its shares. The wells drilled by Marathon Oil have extremely low oil price breakeven costs and need oil prices of just $35 a barrel to be profitable.

MRO continues to cut down costs substantially and is striving to achieve a 30% decline in production and G&A costs in 2021 compared to the 2019 levels. Furthermore, Marathon Oil’s significant debt maturities will mostly fall after 2025 and there does not appear much risk here.

Marathon Oil has an expected earnings growth rate of 83.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the past 30 days. MRO has a current dividend yield of 1.2%. The stock price has soared 55.8% year to date.

Devon Energy aims for strong oil production from the Delaware Basin holdings. Devon Energy’s presence in Delaware has expanded due to its all-stock merger deal with WPX Energy. DVN is using new technology in production process to lower expenses.

Devon Energy’s divestiture of Canadian and Barnett Shale gas assets will allow it to focus on its five high-quality oil-rich U.S. basins assets. DVN’s stable free cash flow generation allows it to pay dividend and buy back shares. Devon Energy has ample liquidity to meet near-term debt obligations.

Devon Energy has an expected earnings growth rate of 84.7% for next year. The Zacks Consensus Estimate for current-year earnings improved 10.5% over the last 30 days. DVN has a current dividend yield of 6.6%. The stock price has appreciated 40% year to date.