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Soaring Energy Prices Belie ‘Cheapest Ever’ Energy Stocks
Besides USD cash, commodities are the only asset class that's worked in 2022.
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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.