Energy Stocks During a Crisis: A Smart Investment or Not?
There’s nothing like a shaky stock market to push investors into reevaluating their positions. Underperforming growth stocks get judged more harshly, and overvalued companies suddenly seem that much more inflated. As they cull their portfolios of losers and reallocate their holdings, many investors start to eye energy stocks. But are energy stocks during a crisis a smart investment?
Traditionally considered defensive investments, there are plenty of reasons to gravitate toward energy and utility stocks when markets begin to waver. The attractiveness of energy stocks is only amplified in the face of major crises, such as the ones we face in 2022: the Russo-Ukrainian War, rampant inflation and ongoing supply chain disruptions.
Anyone paying attention to market sectors this year can plainly see that energies and utilities have outperformed the broader market. Here’s a closer look at why many investors have begun to shelter their money in energy stocks.
Energy and Utilities Perform Well in Volatile Markets
Historically speaking, energy stocks and utilities perform well in volatile markets. This performance boils down to stable, consistent and predictable demand. Oil, gas and electricity producers will always find their products essential. By contrast, the utility companies that administer these products will always have a need to supply them to end users. Even in massive global recessions, energies remain in-demand.
Perhaps the biggest advantage energy companies have during a crisis is their ability to pass costs downstream, all the way to the end user. This is a phenomenon currently evident in rising gas prices. Crude oil prices surged past $100 per barrel in early March, with international benchmark Brent crude reaching almost $140 per barrel at its peak. The result? Global gas prices skyrocketed as drivers ultimately burdened these increased costs at the pump.
The same goes for natural gas. Natural gas producers are able to pass on cost increases to customers with little-to-no negative impact, largely because energy is an essential commodity. Though these are generally pass-through expenses that don’t net energy companies increased profits, they nevertheless preserve margins in times of economic turbulence.
Top Performing Energy Stocks in 2022
Energy stocks during a crisis can be a smart way for investors to safeguard themselves if they choose to remain in equities. The stability of energy stocks—many of which pay a healthy dividend—is an attractive draw in markets that are in decline or trading sideways. In protracted bear markets, energy stocks can even behave similarly to bonds for those seeking income investments with upside.
To better understand the draw of energy stocks during a crisis, look no further than some of the top performers of 2022. These companies are all strongly outperforming the year-to-date S&P 500 return of -11%:
- Chevron (NYSE: CVX) is up over 32% year-to-date and pays a 3.58% dividend.
- ConocoPhillips (NYSE: COP) is up 30% this year and pays a healthy 2.45% dividend.
- ExxonMobil (NYSE: XOM) is up more than 20% year-to-date and pays a 4.5% dividend
- Shell (NYSE: SHEL) is up over 12% year-to-date and pays a dividend of 3.56%.
As a whole, the energy sector has handily beat every other sector so far in 2022. Integrated oil and gas companies are up an average of 20-30%, followed by similar year-to-date increases by pure-play energy providers. Even equipment service providers and midstream energy companies have seen market-beating gains in 2022. This, while almost every other sector shows red this year. It’s a compelling argument for energy stocks during a crisis.
What About Renewables?
You can’t talk about the energy market in 2022 without discussing renewables. As climate change comes more and more into focus, demand for renewables is certainly on the rise. This includes everything from solar and wind energy production to renewable-focused products like electric vehicles.
Unfortunately, while oil and natural gas stocks outperform in times of economic turbulence, renewables aren’t so well insulated. It comes back to the essential nature of fossil fuels. Renewables simply aren’t utilized in a critical capacity yet and thus, are less essential. While this is likely to change in the future, during a crisis isn’t the time to put a bet on emerging tech in the renewables space.
In contrast to petroleum and natural gas producers, solar and wind energy stocks are down sharply in 2022. Emerging leaders like First Solar, Inc. (NASDAQ: FSLR) and SunPower Corporation (NASDAQ: SPWR) are both down 10-15% year-to-date. Meanwhile, the First Trust Global Wind Energy ETF (NYSEARCA: FAN) is down ~8% year-to-date. While the future of renewables is all but certain, market turbulence reminds us that these energy producers aren’t yet proven in a down market.
Investor Sentiment on Energy Stocks During a Crisis
Beyond stability and predictability in a crisis, energy stocks appear poised for success in the near-term—at least, according to investor sentiment.
Nothing screams long-term investment opportunity like portfolio additions from legendary investor Warren Buffett. Buffett’s holding company Berkshire Hathaway (NYSE: BRK.B) recently purchased 91 million shares of Occidental Petroleum (NYSE: OXY): roughly 10% of the company’s current float. It’s not just a bet on the integrated oil and gas giant; it’s a bet on the energy market’s performance over the next few years.
As stock markets continue to ride the wave of global economic uncertainty and weather crisis after crisis, energy stocks continue to solidify themselves as safer investments. For those committed to equities regardless of market outlook, energy stocks during a crisis offer safe haven potential. Or, at least, safe enough for one of the most successful investors of all time.