In 2020, the energy sector was the worse performing one, with a total return of -34% on the year. However, 2021 brought a sharp bounce from the lows, and energy stocks are likely to outperform in 2022 too. They are returning cash flows to shareholders, and oil demand is expected to reach new highs.
The oil price settling in negative territory in 2020 was one of the most spectacular reactions to the COVID-19 pandemic. When it became obvious that there was no demand for oil as economies went into full lockdown mode, buyers fled.
As such, the price of oil settled to -$37 in 2020 but then bounced from the lows. Yet, the bounce was not enough to erase all the losses the energy sector took that year. Eventually, the total return for 2020 was a negative 34%.
However, oil rallied in 2021, climbing all the way back to $80. The move also triggered a sharp rally in energy stocks, which delivered a solid 55% return, much higher than the S&P 500.
Will the rally continue in 2022? Here are four reasons to buy energy stocks:
- Strong earnings in the energy sector
- Energy stocks return cash to shareholders
- Oil demand to surpass 2021 levels
- Attractive valuations for energy stocks
Strong earnings in the energy sector
One of the most interesting aspects about the energy sector is that, while the sector’s earnings have recovered, the prices have not. To exemplify, it is worth mentioning that earnings have recovered to 2018 levels, while prices are below such levels by about 20%.
Energy stocks are returning cash flows to shareholders
Energy stocks pay a hefty dividend. Their disciplined approach relative to capital expenditures led to a strong financial position and now they are returning cash to shareholders.
Throughout 2021, the gap between CAPEX and EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) increased constantly.
Oil demand is expected to reach new highs in 2022
As the world economy recovered from the COVID-19 pandemic, so did the oil demand. In 2022, oil demand is expected to surpass the 2019 pre-pandemic levels, thus another incentive to own energy stocks.
Valuations are attractive
Finally, valuations in the sector look attractive. To exemplify, consider the price-to-cash-flow ratio – the sector is priced below the 5-year average by about 25%.