Oil Stocks Are Back. Pioneer and 3 Others to Ride the Wave.

Text size

Oil stocks have quietly been the market leaders this summer—and they should have the energy to keep the streak going the rest of the year.

With technology stocks taking a break, the

Energy Select Sector SPDR
exchange-traded fund (ticker: XLE) has been the best sector performer since the start of June, gaining 17% during that time. That’s well ahead of the second-place sectors, consumer discretionary and industrials, each up 12%. All three sector rallies reflect improving investor sentiment on the U.S. and global economy and the market pricing in peak benchmark interest rates.

Energy stocks have other things working for them, too. Prices of crude and natural gas have been boosted by several moves on the supply side. Russia and Saudi Arabia continue to pursue voluntary production cuts, while workers at liquefied-natural-gas plants in Australia have threatened to strike, which could take more supply off the market. The U.S. price of crude oil has surged 19% since June 1, to around $81 a barrel, as the natural gas price has added 17%, to $2.80 per million British thermal units.

“Supply reductions (real, announced, or potential) and peak rates have pushed energy prices higher in the past three months,” write BofA Securities commodity strategists. More signs of improving demand would help boost the oil price too, but with China’s faltering recovery, that may be wishful thinking for now.

Rising oil prices have boosted energy stocks, and signs point to continued gains. While fewer than 15% of energy stocks in the

S&P 500 index
were above their 200-day moving averages earlier this year, the recent rally has pushed that percentage to greater than 90%. When that proportion of energy stocks has flipped so dramatically in that direction, the sector has been higher six months later in 21 out of 25 historical occurrences, according to data from Dean Christians, senior research analyst at SentimenTrader. While there have typically been some bumps along the way—and a dip in oil prices over the next few weeks shouldn’t come as a surprise—energy stocks sported a median gain of 10% six months later.

Oil exploration-and-production companies look like the sweet spot for investors, rather than refiners, oil-field services providers, or other energy-related firms—and not just because of the higher price for the commodity they take out of the ground. Operating costs and capital expenditure requirements are coming down for many producers this year and next, as pandemic-related supply-chain and labor pressures ease. That means higher cash returns for investors, as was seen during second-quarter earnings season.

“The key learning from 2Q23 E&P earnings was clear signs of a comeback for U.S. shale,” wrote J.P. Morgan analyst Arun Jayaram. “The strong quarterly results were driven by better than expected well productivity trends, impressive drilling efficiency gains, and deflationary tailwinds, which are poised to improve capital efficiency in 2024.”

Jayaram upgraded shares of

Pioneer Natural Resources

(PXD), a $55 billion independent shale oil and gas producer focused on West Texas’ Midland Basin, to the equivalent of Buy from Neutral. He expects the company to increase its oil production by at least 5% next year without spending a penny more on capex. Productivity and efficiency gains are already under way: On Pioneer’s second-quarter call, management increased its 2023 oil-production guidance by 1.2%, while also lowering its capex forecast by 3%.

Mizuho Securities USA’s Nitin Kumar also has Pioneer as one of his top picks, and he recently upgraded producers

Chevron

(CVX),

Matador Resources

(MTDR), and

Permian Resources

(PR) to Buy, while lowering refiners

Marathon Petroleum

(MPC),

HF Sinclair

(DINO), and

Magnolia Oil & Gas

(MGY) to Neutral. “Although near-term refining margins are likely strong, risk/reward is skewed to the downside and we move to the sidelines,” Kumar wrote.

Stick with shares of companies pumping the sticky stuff.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com