We’re now halfway through 2021, and US equities are enjoying one of the best first-half starts in years. The S&P 500 rose 14.4% from January to June, while the Dow and Nasdaq rose 12.7% and 12.5%, respectively. In particular, the S&P 500 – which is considered to be one of the best mirrors of the entire stock market – not only posted its second-best performance in the first half of the year since 1998, but also reached a number of all-time highs. The index’s excellent run was driven by optimism about America’s faster economic recovery from stimulus payments, increased vaccinations and business resumption that offset concerns about rising inflation levels.
Energy arises as a star performer
At the sectoral level, Oil / Energy has led the S&P rating so far this year with a plus of 42.14%. The range has clearly outperformed the market, with Energy Select Sector SPDR – a compilation of the largest U.S. energy companies popularly known by the ticker XLE – hitting a new 52-week high and jumping more than 145 in June % from its lockdown lows last March, fueled by hopes for a faster recovery in demand. To be precise, the Energy Index returned 27.3% total return in 2021 versus 15.1% for the S&P 500.
With a rollercoaster ride for investors, crude oil has seen a staggering spike – from minus $ 38 a barrel in April 2020 to yesterday hit a more than two-and-a-half year high of $ 75.23 a barrel.
The commodity has spent much of the past few months trading higher due to continued vaccine-related developments and their successful adoption around the world, offering hope for an earlier than expected recovery in demand. The calibrated production policy of the OPEC + cartel has also boosted oil. It is widely believed that at today’s monthly meeting, the member countries of the OPEC + group – a coalition between OPEC countries under King Saudi Arabia and non-members under the leadership of Russia – will decide to reduce production by 400,000-500,000 barrels each from August Day to increase their confidence in fuel needs. Decreasing coronavirus infections, signs of robust demand from the world’s second largest oil consumer, China, and the passage of the $ 1.9 trillion stimulus package are the other positive aspects of oil history.
While most energy investors had something to cheer about so far in 2021, some stocks certainly fared better than others. The five biggest contributors to earnings since the start of the year were Marathon oil MRO, Diamondback energy CATCH, Devonian energy DVN, Occidental Petroleum OXY and EOG resources EOG.
Will these winners hold their course in the second half of the year or will they flop towards the end of the year? Here is a brief summary of them:
Marathon Oil: The upstream energy company’s oil and gas operations are primarily concentrated in the United States (including Oklahoma, Eagle Ford, Bakken, and Northern Delaware) and Equatorial Guinea.
For the last quarter of the report, Marathon reported adjusted earnings per share of 21 cents, beating Zacks’ consensus estimate of 13 cents. The company’s bottom line was positively impacted by tight cost controls and a better than expected contribution from the international E&P segment. It is also gratifying that Marathon has increased its quarterly base dividend of over 30% from 3 cents to 4 cents per share.
This Zacks Rank # 3 (Hold) stock outperformed the other energy companies, rising 104.20% over the period, taking first place on the S&P 500 list. However, it remains to be seen whether Marathon could gain similar appeal in the short to medium term. As the company prepares for strong free cash flow generation over the next few years, volatile commodity prices and the way it trades in the future could have a significant impact on Marathon’s business.
You can see the full list of current Zacks # 1 Rank (Strong Buy) stocks here.
Diamondback energy: Diamondback Energy is focused on growth through a combination of acquisitions and active drilling in the Permian Basin. Diamondback’s leading position in the unconventional market has improved yet again with the recently completed acquisition of QEP Resources.
Diamondback’s first quarter results exceeded expectations, led by better-than-expected production. The total volume was 307.4 thousand barrels of oil equivalent per day (MBOE / d), which exceeded the Zacks consensus estimate of 302.6 MBOE / d.
This Zacks Rank # 3 stock is up 93.99% over the past six months. Diamondback appears to be well positioned with its low-cost structure and investment-grade balance sheet, which should allow it to thrive in the ongoing commodity boom. However, with crude oil making up the majority of Diamondback’s reserves and production, the company’s results are vulnerable to fluctuations in oil markets. The relatively high level of debt also remains a cause for concern.
Devonian energy: Devon is an independent energy company whose oil and gas operations are primarily concentrated in the onshore areas of North America, primarily in the United States. The company’s assets are distributed among the major oil reserves of the Delaware Basin, Eagle Ford, Anadarko Basin and Powder River Basin.
For the last quarter of the report, Devon Energy reported adjusted earnings of 45 cents, beating Zack’s consensus estimate of 35 cents per share by 28.6%. The outperformance reflects production that is above expectations.
Devon, ranked # 3 in Zacks, gained 87.53% in the first half. The company’s recent merger with WPX Energy has strengthened its activities in the fertile Permian Basin. Devon’s expense management, the divestment of Canadian assets and the completion of the Barnett shale gas facility sale will allow Devon to focus on its holdings in four high quality, oil-rich US basins. The company’s innovative dividend policy is also intended to attract investors. However, the stock’s uptrend is limited by product cost inflation and volatility in oil / gas prices.
Western petroleum: Founded in 1920, Occidental Petroleum, headquartered in Houston, Texas, is an integrated oil and gas company with significant exploration and production commitments. The company also produces a wide variety of basic chemicals, petrochemicals, polymers and specialty chemicals.
Occidental reported a loss of 15 cents per share for the first quarter of 2021, lower than the Zacks Consensus estimate, which was down 33 cents. The better than expected end result could be attributed to strong production and higher realized prices.
This Zacks-ranked # 3 stock was the fourth best sector performer in the S&P 500 index, with the stock gaining 80.65% in the first half. Occidental’s continued focus on the Permian Basin, efficient cost management and an impressive asset profile are key pluses. However, the company’s struggles with massive long-term debt of roughly $ 35.5 billion and the impact of the cancellation of the asset sale deal in Africa could limit price gains.
EOG resources: EOG Resources is a world class US shale company. The United States accounts for more than 92% of total production, with Eagle Ford and the Delaware Basin being the major contributors. Internationally, the company is active in China and Trinidad.
EOG Resources achieved better than expected results in the first quarter of 2021 due to increased crude oil and condensate prices as well as declining rental and drilling costs. The company’s board of directors also announced a special dividend of $ 1 per share. The announcement was accompanied by a regular dividend of 41.25 cents per share.
The upstream operator, which is ranked # 3 in Zacks, saw its shares rise 67.32% in the first half of 2021. EOG Resources should benefit from its attractive growth profile, a huge pool of drilling opportunities, upper quartile returns and a disciplined management team. However, the short-term rise in price of this oil and gas finder to # 3 will likely come under pressure due to rising lease and well operating costs.
The story goes on
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Devon Energy Corporation (DVN): Free Stock Analysis Report
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EOG Resources, Inc. (EOG): Free Stock Research Report
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