Can oil stocks be bought? A complete analysis of investment opportunities in the energy sector in 2023

Oil stocks have demonstrated a unique market performance over the past year. While other sectors have fallen into difficulties, this sector has become one of the few that defied the trend and risen against the market. However, since entering 2023, market attitudes toward oil stocks have undergone a new shift. Can oil stocks continue to be optimistic? This analysis will help clarify your thinking.

Why Focus on the Energy Sector?

Oil’s importance in the modern economy is self-evident. As a vital fuel for transportation, chemicals, and power generation, oil prices directly impact global economic operations. The international situation in 2023 is even more complex—uncertainties in economic recovery, escalation of geopolitical conflicts, and adjustments in global supply chains—all these factors will profoundly influence oil price trends and, consequently, the performance of energy companies.

Past Performance and Current Status of Energy Stocks

2022 was the golden year for energy stocks. When the S&P 500 fell 19%, tech stocks averaged a 30% decline, and communication stocks dropped 40%, energy stocks rose nearly 65%, becoming the biggest winner in the US stock market. The main drivers of this rally were the post-pandemic economic recovery and the energy supply crisis caused by the Russia-Ukraine conflict.

However, this rally did not continue. In early 2023, oil prices experienced significant adjustments, mainly due to two reasons: first, market concerns about a potential recession re-emerged; second, rumors of increased production from some oil-producing countries pushed prices down. Despite crude oil inventories falling more than expected, gasoline demand performed poorly, intensifying downward pressure on oil prices.

What is worth noting is that recent geopolitical conflicts have created potential rebound opportunities for energy stocks. In the short term, escalation of conflicts could push oil prices higher, boosting the performance of energy-related stocks.

Three Major Investment Advantages of Oil Stocks

Cyclical Opportunities Driven by Economic Cycles

Energy demand is closely linked to economic conditions. When the economy slows down, energy demand decreases, and oil prices fall; when the economy improves, demand rebounds, and oil prices rise accordingly. Looking at 2023, the world is emerging from the shadow of the pandemic, with China reopening and travel and trade activities resuming, all indicating that energy demand will gradually increase. This cyclical characteristic creates entry opportunities for investors.

Supply Tightness and Profit Margin Expansion

The energy crisis caused by the Russia-Ukraine war has changed the market landscape. Crude oil prices soared from about $70/barrel at the beginning of 2022 to $120/barrel after the outbreak of war. Even in 2023, this supply tightness has not eased. Major energy companies have accelerated investment, but developing new capacity takes years, making it difficult to fill supply gaps in the short term.

As capacity remains constrained, refining companies’ profit margins are bound to expand. When supply cannot meet demand, the profit per barrel of crude oil increases significantly, lifting the entire sector’s earnings levels.

Attractive High Dividends

Compared to other sectors, energy companies offer more competitive dividends. When oil prices rise and costs remain stable, profits per barrel increase, and most companies choose to distribute higher dividends or implement share buybacks. According to statistics, the energy sector has the fastest dividend growth among all industries, with an annual growth rate of 50% in recent years.

Take ConocoPhillips as an example. Benefiting from high oil prices in 2022, the company returned $10 billion to shareholders last year, including steadily increasing dividends. This high-dividend policy is expected to continue, making it attractive for investors seeking cash flow income.

Outlook for Energy Stocks in 2023

From the beginning of the year to mid-March, energy stocks declined by more than 8%. In the short term, efforts by central banks worldwide to control inflation will suppress energy demand; Europe’s warmer winter compared to previous years has also reduced heating needs. These factors exert short-term pressure on oil prices.

However, in the medium to long term, the situation is different. Due to severe capacity constraints globally, it is difficult to significantly increase production in the short term. Evolving geopolitical situations could again push oil prices higher.

It is important to note that the market generally believes that the overall performance of energy stocks in 2023 will be difficult to replicate the peak levels of 2022. But that does not mean there are no opportunities. When subdividing into different energy fields, investment strategies should be adjusted accordingly:

• Upstream exploration and production companies: If oil prices continue to rise, these companies will benefit the most
• Midstream pipeline companies: These operate pipelines and charge fixed fees, unaffected by oil price fluctuations, offering stability
• LNG exporters: Due to severe natural gas shortages in Europe, companies supplying LNG to Europe have huge growth potential

Detailed Analysis of Five Oil Stocks

1. ExxonMobil (XOM) - A Steady Choice Among Energy Giants

ExxonMobil is one of the world’s largest energy companies, covering all aspects from oil exploration, production, manufacturing, trading, transportation, to sales. The company is massive, with a market capitalization of $418.88 billion, making it an absolute leader in the energy sector.

The company is confident about its short- and medium-term prospects. In December last year, it announced long-term goals, expecting that by 2027, its operating cash flow and earnings will double compared to 2019. This reflects management’s strong growth expectations. Meanwhile, the company increased its share repurchase target from $30 billion to $50 billion (2022-2024). Relative to its $4.2 trillion market cap, a 12% return over three years is quite attractive. Coupled with the current 3.6% dividend yield, this stock is appealing to investors seeking stable income.

2. Chevron (CVX) - The Perfect Combination of Scale and Dividends

Chevron is the second-largest US energy company and the third-largest globally. Besides oil and natural gas production, it supplies aviation fuel and owns over 7,000 gas stations. Its large scale and diversified business structure enable it to withstand industry volatility.

Chevron’s cash flow management is excellent. The cash generated from its oil and gas operations has been continuously paid out to shareholders. Notably, Chevron just announced its 36th consecutive annual dividend increase, setting an impressive record. Additionally, at its February investor conference, the company raised its annual share repurchase target to $17.5 billion. These initiatives demonstrate management’s confidence in the future, making it a high-quality choice in volatile markets.

3. Enbridge (ENB) - A Stable Cash Cow in Pipeline Business

Enbridge is a highly diversified energy infrastructure company, mainly operating large-scale oil pipelines, transporting 30% of North American oil. Most of its revenue comes from natural gas refining, transportation, and storage.

Enbridge’s unique advantage lies in its business model. Its pipeline operations use fixed fee arrangements, disconnecting revenue from oil price fluctuations. In other words, regardless of how oil prices move in 2023, Enbridge can maintain stable cash flow. In an environment full of industry uncertainties, such stability makes it a preferred choice for many investors. Notably, Enbridge currently offers a 7.13% dividend yield, ranking among the top in the energy sector.

4. ConocoPhillips (COP) - Cost-Leadership Advantage

ConocoPhillips is the world’s largest independent oil and natural gas exploration and production company. Its core competitive advantage is extremely low operating costs—less than $30 per barrel of oil equivalent. This means that even if oil prices fall, the company can still maintain stable operations and profits. Conversely, when oil prices rise, its profit growth accelerates.

The company is also expanding new projects. In March this year, the US government officially approved ConocoPhillips’ $7 billion oil and gas project in Alaska. Additionally, the company is developing advanced technologies to extract more energy from existing reserves. These new growth points will drive ConocoPhillips’ future performance.

5. Cheniere Energy (LNG) - Beneficiary of Europe’s Energy Crisis

Cheniere Energy is a leader in the global LNG industry, ranking first in the US and second worldwide. The energy crisis triggered by the Russia-Ukraine war has caused Europe to face natural gas shortages, with import demand far exceeding supply.

Because European natural gas prices are higher than in the US, Cheniere has the opportunity to expand supply to Europe significantly. According to the company’s Q3 2022 financial report, LNG imports to Europe increased by 65%, with Cheniere accounting for a quarter of Europe’s imports. The LNG production in that quarter also increased by over 200% year-on-year. In the short term, Europe’s natural gas supply remains tight, providing Cheniere with stable growth potential for the coming years.

Overview of Major Global Oil and Energy Stocks

Data as of March 18, 2023

Five Key Factors Influencing Oil Stock Trends

Global Economic Expectations

Central banks worldwide continue efforts to control inflation, and further rate hikes in 2023 are possible. The market generally expects the global economy to face slowdown or recession risks, which directly suppresses energy demand and exerts negative pressure on the entire sector.

Capacity Supply Status

Supply and demand are decisive factors affecting the performance of the energy industry. The recent adjustments, after the energy shortages caused by the Russia-Ukraine war, partly stem from inventory increases due to previous price hikes and large-scale procurement, easing market supply pressure.

Regulatory Policy Orientation

The global commitment to combating climate change is strengthening. Leaders in various countries are enacting regulations to limit fossil fuel production and use. The US plans to invest $400 billion over ten years in clean energy and innovation, indicating that green energy will continue to rise. Traditional oil companies face the choice of extinction or transformation, with transformation being highly challenging for giants.

Impact of Technological Innovation

Development of new energy technologies is changing the global energy landscape. Over the past decade, green energy such as solar and hydrogen has become increasingly mature in development, storage, and application, widely used across industries. The rapid adoption of electric vehicles reduces traditional demand for gasoline and diesel. Long-term, this trend will weaken the value of traditional energy industries.

Profitability Shift

Oil companies face dual pressures from investors: on one hand, they expect higher returns during rising oil prices and strong demand; on the other hand, they are urged to cut costs due to the new energy trend. In this dilemma, oil production has not increased, but profits have surged. Reports indicate that profits of oil companies doubled in 2022, but US crude oil capacity is expected to be cut by 21% in 2023, and this contradictory trend continues.

Long-term Investment Value of Oil Stocks

From a long-term perspective, oil stocks still hold significant investment value. Energy demand will only continue to grow, not decrease. Europe relies on US LNG imports, and China remains the second-largest oil consumer globally; these fundamentals have not changed.

However, investors must recognize that the energy industry is highly volatile. On one hand, economic recession drags down energy demand; on the other hand, geopolitical conflicts keep pushing oil prices higher. In such a complex and volatile environment, selecting individual stocks carefully and allocating rationally are especially important.

For investors seeking stable cash flow, Enbridge and Chevron are good choices; for those optimistic about rising oil prices, ConocoPhillips and Cheniere Energy offer different growth opportunities; for investors favoring large integrated energy companies, ExxonMobil and Chevron are top options.

Final advice: investing in oil stocks is possible, but avoid blindly chasing highs. Only by fully understanding industry cycles, regulatory environments, and the fundamentals of individual stocks can you make wise investment decisions.