The US energy sector is dominated by one thing – oil. This year has not been a strong year for prices of the black stuff. After making a partial recovery in April from a crash in prices at the end of 2018, the price of crude oil has largely stuttered for the remainder of 2019.
Struggling oil prices have had an impact on gains in the share prices of the big US energy companies, as well as the major energy ETFs. The biggest oil firm in the US by market cap, ExxonMobil's [XOM] stock is largely flat so far in 2019, but has dropped off its YTD high of $83.49 by 17.4%. The second-largest firm, Chevron [CVX], meanwhile has seen its stock gain 6.9% in the same period, but is still 6.6% off its 2019 high achieved in April.
Like Exxon and Chevron, the Energy Select Sector SPDR Fund [XLE] – the largest energy ETF, with 43% combined weight on the two oil behemoths – has also underperformed the S&P 500. It has gained just 7% in 2019 (up to 22 November) compared to gains of 24% for the US benchmark index in the same period.
The Vanguard Energy ETF [VDE], along with the Energy Select Sector SPDR, generally track the movements of Exxon and Chevron. Like XLE, VDE has had a less than stellar 2019 – as of 22 November, it was up 1.12% in 2019. It’s worth noting that VDE is a low-cost fund to invest in and has holdings in over 100 oil companies, weighted by market cap, so if oil companies were to begin making a strong uptick, it is an ETF to keep in mind.
Another strong performing US energy ETF in 2019 has been the First Trust NASDAQ Clean Edge Green Energy Index Fund [QCLN]. The ETF tracks the NASDAQ Clean Edge Green Energy Index [CELS], which is comprised of US (along with some Canadian) companies that are primarily manufacturers, distributors, or installers of clean-energy tech. It has made solid gains of 27% in 2019 (as of Nov 20), outpacing the S&P 500.
After a difficult couple of years with demand not fully materializing, 2019 has generally been a strong year for renewable energy stocks. This is expected to continue in 2020, especially as climate change increasingly tops the global political agenda.
Stocks to watch
A key US renewable energy stock to watch in 2020 is Florida-based NextEra [NEE]. The company is the world's largest generator of renewable energy from the wind and sun and the biggest electric utility holding company by market cap in the US. The stock reached an all-time high of $238.34 at the end of October and has gained 34.2% so far in 2019 (up to 22 November).
With the company being among the world’s fastest-growing energy firms, many analysts are expecting this to continue into 2020 as renewable energy enters its “golden age”. NextEra’s third-quarter earnings in 2019 saw a year-on-year increase of 12%, for example. Of 15 analysts polled by CNN, 13 rate NextEra a buy.
Zacks Investment Research is, however, less bullish on the stock: “Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, NextEra has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.”
Back to oil
But it’s not all bad. While oil prices are not expected to have massive gains anytime soon, small increases in prices are expected in December 2019.
However, oil demand is set to decrease in the long term – with many analysts arguing that global demand will peak within a decade – energy companies that are specialising and diversifying are expected to continue to do well. US renewable energy stocks have meanwhile had a stellar 2019, with strong gains expected to continue in 2020. Diversification for both companies and investors would appear to be the key to success in energy in the coming years.
|PE ratio (TTM)||20.08||16.98||34.76|
|Quarterly Revenue Growth (YoY)||-14.50%||-17.40%||26.20%|
On the non-renewable front, some analysts argue that ExxonMobil’s poor performance in 2019 signals that the stock could be due an uptick. Oleum Research argues that “the bottom seems to be nearing” for the oil giant although it is, for the time being, taking a neutral position.
Writing on InvestorPlace, Trading Common Sense founder Wayne Duggan, argues that at its current reduced price (the stock is trading around 35% off its 2014 all-time high), Exxon is a “high yield transformation story”.
“Exxon stock is cheap, it has a solid balance sheet, near-term cash flow growth opportunities and a world-class 5% dividend yield. It may not be a top performer in your portfolio, but XOM stock is a solid, low-risk source of dividend income with near-term risk to the upside,” Duggan adds.
“It may not be a top performer in your portfolio, but XOM stock is a solid, low-risk source of dividend income with near-term risk to the upside” - Trading Common Sense founder Wayne Duggan
A final stock to watch out for is EOG Resources [EOG], an oil and gas exploration and extraction firm focused on locating premium drill sites (those that are highly productive and relatively inexpensive to operate) – something that is advantageous as oil prices are expected to fall in the first half of 2020.
The company has also been focused on improving efficiencies over the past five years. These factors, along with the fact EOG has gained 5.3% this month (as of 22 November) but is still trading 45.5% off its September 2018 all-time high, meaning it could be well placed for further gains in the near future.