Energy stocks may be the rare sector that appeals to both cautious investors and those who are willing to take more risk, contends an opinion piece in The Wall Street Journal. While the energy sector has proved to be an inflation hedge, it also has huge growth potential as long as money continues to pour into energy instead of tech.
From 2009 to 2021, low interest rates swayed investors to take more risk, particularly in U.S. tech stocks. In the energy industry, those same low interest rates pushed oil companies to put too much money into projects that didn’t produce high returns, and many shareholders began to advocate for more ESG mandates. So while investors were paying high values for uncertain future profits in the tech sector, they weren’t willing to do the same for energy stocks. Tech companies were able to invest in expensive long-term projects by trading on short-term profits, but energy companies were expected to do just the opposite, the article maintains.
Then came 2022, with its raging inflation, rising interest rates, and the war in Ukraine. All three factored into the realization that shifting away from fossil fuels isn’t going to happen in prescribed time that many ESG mandates allow for. But U.S. energy stocks are poised for growth; earnings per share rose 93% from June 2018 to June 2022 while stock prices fell only 3%, whereas tech stocks’ earnings went up 73% and prices skyrocketed 82% over the same period. And energy stocks have not yet factored in the impact of a potential imbalance in gas and oil’s supply-and-demand, given that China’s demand has been significantly lowered due to their strict Covid restrictions, and the looming ban in the EU on Russian oil, set to take effect in December.
Though policy changes in the U.S. have given the industry a tailwind, managers connected to ESG are still the biggest bloc of shareholders in public U.S. energy companies and have imposed mandates in an effort to combat climate change, without lining up viable alternatives. If non-ESG investors were to outvote them and call for more investment in production to meet demand for the long-term, U.S. energy companies could still outperform. Indeed, Warren Buffett has pushed for that, garnering 20%+ stakes in more than one U.S. energy company this year, which could likely influence other investors to push for the same, the article portends. So while Exxon Mobile is the only U.S. energy company in the top 10 largest companies around the world—and four out of the 5 largest are U.S. tech companies—the U.S. energy sector could very well find itself on top once again.