Soaring Energy Prices Belie ‘Cheapest Ever’ Energy Stocks

Besides USD cash, commodities are the only asset class that's worked in 2022. Everyone can recite the stocks story, and global bonds fell into their first bear market in at least three decades this week. Looking out across assets, one finds commodities up 35%, cash up 0.4% and nearly everything else mired in a deep slump. 2022 is (easily) the worst year for a cross section of popular assets since 2008 (figure above). I suppose this goes without saying, but losses in 2018, near the end of th

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One thought on “Soaring Energy Prices Belie ‘Cheapest Ever’ Energy Stocks”

I’ve been very overweight energy since early 2021. Back then, almost every energy name looked very undervalued, on consensus estimates that looked clearly too low, even assuming negative terminal growth. My picking was ok but it didn’t matter, everything worked.

Today, the typical energy name looks overvalued, on consensus estimates that don’t look clearly too low or too high, assuming terminal growth flat. To get undervaluation, I usually (not always) need to assume oil holds above $70 through the forecast period (to 2026) and terminal growth is slightly positive. That’s possible, I guess, but doesn’t feel like the no-brainer of early 2021.

Nevertheless, I’m still overweight energy.

I’ve narrowed down to US gas exposure (thesis of growing LNG -> US gas becomes globally taxable -> new floor for Henry Hub in mid single digit $), European gas exposure (thesis of permanent turn away from Russian gas -> LNG + renewables + nuclear + conservation can’t meet demand -> EU won’t totally screw up market pricing), and one European oil major that has underperformed badly (you can guess which total dog this is).

As for generic exposure to oil price, I’m sympathetic to the thesis of peak oil supply + constraints in renewable ramp -> prices higher for longer, and encouraged by declining storage, recovering demand, the end of SPR releases, and OPEC+ action, but those are fundamentals for physical oil, while in the short term financial oil feels vulnerable to recession fear. So I’m mostly on the sidelines. Yeah, I’m an energy “tourist”, not a steel-nerved HODLer.