There is not a lot of good news surrounding the energy sector these days. Many have shunned the entire industry as a form of investment, and in terms of public relations, the group has become something of a pariah for institutional investors and fund managers due to increasing awareness and demand for action surrounding climate change.
Last year was a particularly painful year for energy stocks, which returned just 5% against a 28% return for the S&P 500. The past month has been particularly brutal on the already hard-hit sector. During the fourth quarter, profits were anemic, including an eye-popping 70% drop in Exxon Mobil’s (NYSE:XOM) operating earnings. The energy sector has trailed the S&P 500 for seven of the past eight years, and the group is already down 10% in 2020 compared to a 3% rise in the S&P 500.
With all the bad news that has plagued the industry for the past several years, what makes the sector so attractive currently? Who in their right mind would want put their money in these companies, whose shares have been heading on a persistent downwards trajectory for over the past five years?
Precisely because of the difficult times suffered by the energy stocks over the past few years, there is now a noticeable disconnect between energy and the overall market, which ascended to new highs recently while the battering of the trailing energy sector continued.
This mismatch has now reached the point where it is so glaring that the energy industry looks appealing from a valuation perspective. Additionally, energy stocks have been further depressed recently on fears of economic fallout from the new coronavirus.
In addition to the dramatic drop in oil prices from 2014 to 2016, and more recently in 2018-19, some of the depressed share prices can be attributed to political factors such as heightened concerns about climate change, now currently in vogue among many institutions. Adopting these moral standpoints to attract more capital has led to a fair amount of investing firms divesting themselves of energy stocks.
The dividend yields on many energy stocks are now considerably higher than any fixed-income yields available. The yield on the benchmark 30-year treasury bonds fell to a record low