The oil and gas sector has lost much of the momentum it enjoyed earlier in the year largely due to persistent fears of demand weakness. The energy sector's 7.1% return in the year-to-date has been well below the S&P 500's 17.2% gain placing it 10th amongst 11 U.S. market sectors.
According to StanChart, both up and down price cycles over recent months have been primarily due to spillovers from interest rates markets as well as a seasonal dominance of algorithmic trading.
Not surprisingly, Wall Street is increasingly turning against oil and gas stocks: On Monday, Oppenheimer analysts downgraded the energy sector from market weight to underweight, saying "with previous inflationary tailwinds largely removed, the sector currently sports the fewest stocks above their 200-day average."
That said, some of the top gainers in the stock market this year have been energy companies. Here are 5 best-performing energy stocks, which include exclusively energy stocks from the Energy Select Sector SPDR Fund ETF (XLE):
#1 Targa Resources Corp. (NYSE:TRGP)
Market Cap: $31.6B
Year-to-Date Returns: 67.0%
Texas-based Targa Resources Corp. (NYSE:TRGP) owns general and limited partner interests in a limited partnership that provides midstream natural gas and natural gas liquid services. The company gathers, compresses, treats, processes, and sells natural gas. TRGP has earned a Buy recommendation from Goldman Sachs thanks to a strong return on equity (or ROE).
"Stronger-than-expected economic growth represents the clearest upside risk to ROE. [It] would create upside to asset turnover through faster sales growth and to profit margins through operating leverage. Stronger growth has recently coincided with hotter-than-expected inflation, however," wrote GS analyst David J. Kostin."
Related: Why Coal is Still a Cornerstone of the Global Energy Mix
GS estimates that Targa Resources will be able to grow its ROE by 17% in the current year. TRGP has been an exceptional performer, and is currently trading at a decade-high with only Nvidia Corp. (NASDAQ:NVDA) boasting a higher return amongst the famous FAANG group of stocks. Earlier in the month, Targa reported a second quarter 2024 net income of $298.5 million compared to $329.3 million for the second quarter of 2023 with profits falling due to lower oil and gas prices.
#2 Diamondback Energy Inc. (NASDAQ:FANG)
Market Cap: $34.7B
Year-to-Date Returns: 29.8%
Midland, Tex.-based Diamondback Energy, Inc. (NASDAQ:FANG) has been one of the standout performers in the ongoing earnings season. The company reported Q2 revenue of $2.48B (+29.2% Y/Y), beating Wall Street consensus by $280M while Q2 Non-GAAP EPS of $4.52 beat by $0.02. The company averaged production of 276.1 MBO/d (474.7 MBOE/d).
Earlier, Diamondback Energy agreed to buy privately held Permian producer Endeavor Energy Resources in a cash and stock deal valued at $26 billion. What's impressive here is that Diamondback Energy is only valued at $34B (market cap). Interestingly, FANG shares have jumped more than 10% after the deal was announced nearly a week ago, meaning the market views it favorably. Stock prices of the acquiring company, more often than not, tend to go down as the company has to pay a premium coupled with the high risk of failure.
#3 The Williams Companies (NYSE:WMB)
Market Cap: $54.8B
Year-to-Date Returns: 29.4%
The Williams Companies Inc. (NYSE:WMB) is one of the largest energy infrastructure companies in the United States, operating 33,000 miles of pipelines in total, which it says account for a third of the transported gas in the U.S. The company has been posting solid results, with the recent pop in electricity demand growth, particularly from artificial intelligence (AI) data centers, likely to keep demand for the company's gas pipelines high.
WMB has continued to expand its gas infrastructure. Earlier in the year, the company completed the purchase of facilities with transport links from Hartree Partners for $1.95 billion. The gas assets include six underground natural gas storage facilities in Louisiana and Mississippi with a total capacity of 115B cf, 30 pipeline interconnects to attractive markets including connections to Transco, and 230 miles of gas transmission pipeline. Transco is the largest U.S. natural gas transmission pipeline
"Importantly, this storage will also allow us to provide value to customers in markets with growing renewables adoption as daily peaks for natural gas increases the need for storage," Williams President and CEO Alan Armstrong said in a press release.
#4 ONEOK Inc. (NYSE:OKE)
Market Cap: $51.5B
Year-to-Date Returns: 28.8%
Tulsa, Oklahoma-based ONEOK Inc. (NYSE:OKE) is another midstream infrastructure company that engages in the processing, storage, transportation, and marketing of natural gas and natural gas liquids. The company recently posted Q2 adjusted EPS of $1.33, beating the Wall Street consensus by $0.12 thanks to higher natural gas processing volumes.
Similar to its peers, ONEOK has been looking to expand its gas assets through mergers. The company recently announced the acquisition of 43 percent of Enlink's outstanding common units for $14.90 per unit and 100% of the interests in the managing member for $300 million, for a total cash consideration of approximately $3.3 billion. The acquisition includes a crude infrastructure platform capable of processing 1.7 billion cubic feet per day of Permian gas and 1.6 million barrels per day of Permian crude gathering capacity.
#5 Kinder Morgan Inc.. (NYSE:KMI)
Market Cap: $47.3B
Year-to-Date Returns: 20.8%
Yet another energy infrastructure giant, Kinder Morgan (NYSE:KMI) owns and operates approximately 82,000 miles of pipelines and 139 terminals. Kinder Morgan has reported that its natural gas pipeline segment recorded a boost from higher margins realized on its storage assets and higher volumes on its gathering systems. On the earnings conference call, CEO Kim Dang said he expects "significant new natural gas demand" rising from energy-intensive tech such as AI, crypto mining, and data centers.
"We expect demand for natural gas to grow substantially between now and 2030, led by more than a doubling of demand for liquefied natural gas exports and a more than 50% increase in exports to Mexico," Dang said.
"The emphasis on renewables as the only sources of power is fatally flawed," Dang added, arguing that Big Tech leaders, "like the rest of us, realize that the wind doesn't blow all the time and the sun doesn't shine all the time."
Sital Mody, natural gas president at energy infrastructure company Kinder Morgan, is highly bullish on the Eagle Ford's natural gas prospects. Mody has predicted strong production growth by the Eagle Ford Shale out to 2030 thanks to the favorable economics and low nitrogen content of natural gas produced in the basin. According to data from S&P Global Commodity Insight, natural gas production from the Eagle Ford Shale averaged 5.2 Bcf/d in 2023; Kinder Morgan has forecast that production will grow by another 2.5 Bcf/d, or nearly 50%, by 2030, and probably rival that of the Haynesville.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More