Market NewsCan these three oil stocks continue to outperform the US stock market in the second half of the year?Us stocks have performed badly since 2022. In the first half of this year, the s & p 500 fell more than 20 per cent, its worst first-half performance in 50 years, and inflation fuelled by soaring energy costs wreaked havoc on the stock market.
However, while 2022 has been difficult for most stocks, it has been brilliant for the oil industry. Western oil (OXY.US) has risen more than 100 per cent this year, while CVX.US and DVN.US have risen more than 20 per cent. What contributed to the sharp rise in these oil stocks? Can this strong rally be sustained in the second half of the year and help oil stocks outperform the market?
1. Imbalance between supply and demand. Energy prices soar.
International oil prices have soared nearly 50 per cent to more than $100 a barrel this year, bringing US gasoline prices to an all-time high of $5 a gallon. In addition, us natural gas prices have also soared more than 50 per cent this year.
The following factors have created a "perfect storm" in the energy market and pushed up energy prices: first, years of underinvestment in the development of new oil and gas resources, which has been further exacerbated by the epidemic, leading to global supply shortages. Second, the conflict between Russia and Ukraine has led Western countries to impose a number of sanctions on Russia, which is a major oil and gas producer in the world. Russia, as a major oil and gas producer in the world, has been unable to export its oil and gas products smoothly, further affecting global supply. Finally, with the relaxation of epidemic prevention restrictions, consumers' pent-up travel demand has been released, and the surge in demand has had an impact on the balance of supply and demand.
2. Oil producers' cash flow blowout
Soaring energy prices have given oil and gas producers a huge windfall. According to the data, oil giant Chevron earned $8.1 billion in cash flow from operations in the first quarter of 2022, almost twice as much as in the same period in 2021; Devon Energy generated a record $1.3 billion in free cash flow in the first quarter; Western Oil also set a quarterly free cash flow record of more than $3.3 billion.
Western Oil uses the windfall to repay the same amount of debt, accounting for 12% of its outstanding debt. In addition, the company is expected to launch a $3 billion share buyback in the second quarter, providing a "stepping stone" for dividend growth. Western Oil paid a dividend of just $0.04 a share in 2021, rising sharply to $0.52 a share earlier this year. Vicki Hollub, the company's chief executive, stressed in the company's first-quarter earnings call that debt reduction and share buybacks would ensure that Western Oil's dividends were more sustainable and create conditions for the company to raise dividends at the right time.
The good performance of Western Oil has also attracted the attention of Buffett, the "god of shares". Buffett's Berkshire Hathaway (BRK.A.US) is increasing its stake in western oil stocks, which now stands at 16.4%.
At the same time, Berkshire Hathaway increased its stake in Chevron. Berkshire Hathaway held $25.9 billion worth of Chevron shares at the end of the first quarter, up more than 400 per cent from the end of 2021, making it one of the top four total positions in Berkshire. The holding of the stock will bring more dividend income to Berkshire Hathaway after Chevron raised its dividend by 6% earlier this year.
When it comes to dividends, Devon Energy is no less than that. In addition to paying fixed quarterly dividends, the company will use up to 50% of its excess cash each quarter to pay variable quarterly dividends. The surge in cash flow has allowed Devon to increase its dividend payments, which has increased its basic expenses by 45 per cent so far this year and pushed its annualised dividend yield above 9 per cent.
3. Can oil stocks maintain a strong performance in the second half of the year?
The market has not yet reached a consensus on the future trend of oil prices. On the one hand, the global economy seems to be teetering on the brink of recession, partly because of soaring energy prices, which will hit demand for refined oil products and thus oil prices; on the other hand, OPEC+ recently agreed to increase production by 648000 b / d in July, and improved supply combined with weaker demand could lead to a cooling of oil prices in the second half of the year.
However, most analysts believe that oil prices have the potential to rise further in the future. Michel Tran, global energy strategist at Royal Bank of Canada, said the environment was "the strongest oil market fundamentals in decades, even in history". In the absence of a recession, tighter supply would lead to a significant rise in oil prices, possibly as high as $150, $175 or even $200 a barrel, he said. He believes that even in a recession, there is still a multi-year cycle in the oil market. According to a recent survey by the media, analysts expect the average global benchmark crude price to reach $106.82 a barrel this year, about $5 higher than the May forecast.
Given the dynamics of supply and demand, the oil market is likely to be very volatile in the second half of 2022. However, oil prices seem more likely to remain high than to cool sharply. As a result, oil stocks seem to have enough momentum to move up, Buffy.
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