Demand for oil and gas is on the rise. The Energy Minerals sector is the only notable performer of this year. Many names are up over 15%. Renewable energy has faced more challenges in a high interest rate environment.

Renewable energy

The Invesco Solar ETF made significant gains throughout 2020. The price of the ETF rose from pandemic lows of 21 to early 2021 highs of 125, an increase of nearly 500%. However, since mid-November last year, renewable energy has seen a decline. The price has fallen from 100 down to 60 as renewable energy fell out of favour for oil and gas.

Rising interest rates have hindered the sector. They have made development projects more expensive and reduce the return on invested capital. Inflation makes goods and services more expensive, which can compress margins. Inflation can reduce profitability even if revenue is growing at a good pace. Higher raw material costs and supply chain issues are yet another headwind weighing on margins.

Oil and gas

On the other hand, oil and gas stocks have rallied since earlier September, even more so if we look just at this year. Below is the Energy Mineral companies that are included in the S&P500 and their performance year-to-date.

Image provided by TradingView

Oil and gas is one of the primary causes of inflation. Higher oil and gas prices affect consumers at the pump and through utility costs. On the industrial and commercial front, they raise costs throughout the transportation industry from shipping and logistics companies to airlines and to package delivery companies.

Prices fell during the pandemic for these substances. Everyone was caught out and the high supply was left with no equal demand. Alongside this, many companies have adjusted their short-term strategies from high spending and high growth toward positive free cash flow and stable growth. The long-term shift into de-carbonising operations has left the world with high demand for oil and gas and a supply chain that is not increasing at the same rate, leading to much higher prices. For now, these companies will be continuing on higher profit-margins while keeping healthy balance sheets and investing elsewhere.

On Jan. 18, ExxonMobil (NYSE:XOM) announced its goal for net-zero greenhouse gas emissions by 2050, making it the last of the oil majors to set this goal. In early December, Exxon announced net-zero emissions from its Permian Basin operations by 2030. 

Stand-out sector

As mentioned previously, Energy Minerals has been a stand-out so far this year. An island of green in a sea of red.

Image provided by TradingView

Many companies will offer good returns throughout this year. They also will payout strong dividends.

  • XOM 4.7%
  • CVX 4.2%
  • EOG 2.7%

We think diversifying into this sector can help soften the blow of other market sectors over 2022.

AlphaPicks does not own a position in any of the companies listed. To trade shares and crypto, register here with our preferred partner, EToro.

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