Global Global Global

Global energy stocks are the cheapest in 27 years

Equities 6 minutes to read
PG
Peter Garnry

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
  • Chevron
  • Reliance Industries
  • Shell
  • TotalEnergies
  • PetroChina
  • ConocoPhillips
  • Equinor
  • BP
  • Petrobras
  • Enbridge
Source: Bloomberg
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.