Global energy stocks are the cheapest in 27 years
Head of Equity Strategy
Summary: Global energy companies are currently valued at a staggering 10% free cash flow yield with an outlook that is suggesting higher forward prices on oil and gas in the coming years as the world tries to plug the hole after Russian sanctions. Energy companies are massively profitable with 18% return on equity, but in our grotesque capital markets of 2022 investors are mostly talking about buying the dip in technology stocks. As we recently wrote in our note the inconvenient truth about energy and GDP the world will need a lot of oil and gas over the coming decade, so the investor outlook in energy stocks remains very positive.
Capital allocation has gone wrong in the age of ESG
On the 24 January 2022, we released our Q1 2022 Quarterly Outlook Fueling the Energy crisis in which we stated that the global energy sector had a 10% expected annualized return driven by a 12-month forward dividend yield of 5% and a long-term dividend growth rate of 4.7% annualized in addition to a minor expected valuation expansion. We said “This could turn energy stocks into a secular winner over the coming decade and the implied expected returns are too good to ignore for global investors.” Since the 24 January the global energy sector is up 25% while global equities are down 10% so the global energy sector has proven to be a source of alpha amid weak equity markets and galloping inflation.
What is more remarkable is that the free cash flow yield was 10% in April on global energy companies compared to 6% for the MSCI World. Global energy companies are the cheapest in 27 years despite an energy crisis and strong outlook for oil and gas prices due to sanctions against Russia. Global energy companies are delivering return on equity of around 18% at the current oil and gas prices far outperforming the general market. As we alluded to in several notes and on our podcast the ESG agenda has drastically distorted capital allocation in equity markets with many institutional investors moving out of oil and gas and into renewable energy companies. Sentiment in the equity market is right now about which technology stocks to buy following the recent large declines instead of buying the cash flow rich energy companies with the lowest equity valuations in almost 30 years. The world is still very much inverted.
While the future is greener we will need oil and gas for much longer than any expected and our energy needs are enormous so we dare to stick to our view that energy stocks will be a massive winner over the next 10 years. Below are some of the largest energy companies in the world measured on market cap and that can be traded on Saxo’s trading systems (not investment recommendation).
- Exxon Mobil
- Reliance Industries
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.