The energy sector lost its perch as the top performer on the S&P 500 during the first half of 2023, but a regimen of capital discipline has helped to insulate an industry historically hypersensitive to boom and bust cycles.

The S&P’s measure of the sector’s performance—which includes upstream, midstream and downstream companies—showed that between Jan. 3 and June 30, overall stock values fell nearly 4%. Only the utility sector did worse, dropping nearly 8%. Analysts said macroeconomic factors such as plunging commodity prices hurt the energy sector’s standing, but a focus on low debt and efficiency has also brought resilience.

A 12-month performance snapshot reflecting July 26, 2022 to July 26, 2023 shows the energy sector with upside of nearly 18%. A fading likelihood of a recession is helping the industry’s prospects in the second half of 2023, analysts said.

The performance numbers are from the S&P select sectors. S&P Global states that each sector “is a highly-liquid index designed to track a major economic sector. The indices are intended as tools for investment professionals, allowing them to tailor benchmarks for core portfolios by accounting for changing market conditions.” S&P Global would not release the full list of companies in the S&P Energy Sector. Yardeni Research said the index is made up of three integrated oil and gas companies, Exxon Mobil Corp., Chevron Corp. and Occidental Petroleum; 13 E&Ps including Marathon Oil and Pioneer Natural Resources; three refining companies including Phillips 66; and four oil and gas storage and transportation companies such as Kinder Morgan Inc.

The index performance underscores a common refrain among oil and gas executives who lament that the space remains undervalued. Nevertheless, they continue to boost dividends. Low share prices have also made it cheaper for companies to repurchase shares as part of their cash returns strategy.

The level of decline varied among individual companies’ stock performance.

During the first half of 2023, shares of Devon Energy fell 17%; Chevron stock prices fell almost 11%, and Exxon Mobil’s shares rose less than 1%. Natural gas giant EQT Corp. gained almost 23% per share and stock in oilfield services firm Baker Hughes increased 9% for the period.

Stock market performance analysis is a moving target, and each comparison is a snapshot.

“You’re coming off its best outperforming year in over a decade,” said David Deckelbaum, managing director at TD Cowen.

David Deckelbaum
David Deckelbaum. (Source: TD Cowen)

“The intent of the return-on-capital model was to lower volatility of investments over time, so I think in the range-bound commodity world, the stocks have actually been fairly resilient. I think a lot of that is balance sheet strength and this return-of-capital approach that lowers that volatility,” he said.

Mark Sadeghian, a senior director at Fitch Ratings, said last year’s higher commodity prices are relevant to the sector analysis.

“Pricing was exceptionally high. WTI had an average of around $95. If you look at where we’ve been year-to-date, which would include the first two quarters, WTI has been around $75, so it’s a $20 drop and it’s 21% drop,” Sadeghian told Hart Energy. “Henry Hub natgas has been even worse, in a certain way. It was $6.50 or so last year, and now it’s…sub $2.50,” or a drop of more than 60%.

He also said many energy companies are better suited to withstand any downturn with the better balance sheets and lower debt that are hallmarks of the industry’s current strategy of greater discipline and responsibility.

Scott Lander, chief investment officer at Horizon Investments, said the greater responsibility does not matter to his firm as much as a lower likelihood of a global or U.S. recession.

“They just need to run their business. I couldn’t care less what they are doing on the responsibility side,” Lander told Hart Energy. “They’re doing what they are supposed to be doing on that front. That’s more important to us than trying to check boxes.”

Lander said Horizon Investments will invest more in energy companies this quarter; he declined to offer specific investment figures, but did say its engagement will go from a meaningful underweight position in energy to a meaningful overweight position.

Ryan Keys, founder and president of Triple Crown Resources, said the larger picture shows energy companies in strong health, with no bankruptcies and some companies with low debt and good returns. With these strengths—and a change in commodity prices—investors could come sprinting back to energy once again.

“It might take a year or two to get there,” he said. “Those who pile in later are going to miss the boat.”