Energy investors looking for a gusher in second half

Republicans may be cheering “Drill, baby, drill” at their convention next week, but a Democratic President is typically better for oil and natural gas stocks, says Ben Cook, portfolio manager for the Hennessy Energy Transition Fund.

“Historically speaking, a Democrat in the executive branch of the office has actually been better for commodity prices,” said Cook. “The policies that typically restrict the projects that ultimately facilitate the production and transportation and storage of energy tend to limit the amount of supply in the market and, and ironically, lift commodity prices, which helps energy producers.”

Energy investors like Cook are expecting a strong finish to 2024, and they expect the tailwinds for the sector to come from more than just the race for the White House. First and foremost, they believe energy stocks have a lot of catching up to do.

Energy stocks in the S&P 500, as measured by the Energy Select Sector SPDR ETF (Ticker: XLE), are up just over 6 percent year-to-date. The overall S&P 500 meanwhile is up almost 18 percent, taken higher primarily by technology shares.

Will Sterling, partner at TritonPoint Wealth, says energy shares will more than pull their weight as the bull market broadens in the second half of 2024.  

“Counter to what one may think, when the public equity markets are at or near 52-week highs and breadth has been narrow, that has historically been supportive of equities as widening breadth has historically been the next leg higher,” said Sterling. “That data, coupled with attractive valuations for energy along with supportive cash return strategies make us believe that energy is positioned well for the second half.”

Sterling buys individual equities to implement his thesis and says he is seeing attractive opportunities in the integrated, E&P, and servicer industries. 

“Companies that have demonstrated both commitment and discipline to investor friendly cash return strategies are more attractive to us,” said Sterling.

Cook is a fan of the upstream space for the Hennessy Energy Transition Fund (Ticker: HNRGX), up 11.5 year-to-date. He especially likes ExxonMobil (Ticker: XOM) for the fund which invests across both renewables and through the traditional hydrocarbon value chain.

“We think its diversified integrated business model affords flexibility to generate consistent profits through the cycle,” said Cook. “They've shown tremendous success through the drill bit and through acquisitions to grow their upstream business. And they're doing a great job at returning cash to shareholders in the form of, dividends as well as share repurchases.” 

Craig Golden, senior investment analyst & market strategist at Nepsis, is also overweight energy heading into the second half. He says OPEC remains committed to supply cuts and supporting prices, and any significant increase in oil prices could lead US companies to increase their supply production which will boost revenue. 

He says the other significant factor that should be a tailwind for energy shares is the increased efficiency and profitability within the sector over the past few years. 

“Energy companies have become less dependent on oil price to generate significant profits. This is due in part to technology, like artificial intelligence, and capital discipline by management,” said Golden. “Recent earnings weakness is due to higher capital expenditure costs in the short term.”

As to how he plans to play a second half rally in energy shares, Golden says he focuses on owning capital efficient companies that have proven business models.

“There are opportunities in the exploration & production industry as recent capital expenditures begin generating revenue,” said Golden.

When it comes to natural gas, Cook believes the recent softness in natural gas prices is "reflective of some volumes that recently curtailed their coming back to market." Longer term, however, he anticipates substantial strength returning to the natural gas market.

“That's going to be driven by a combination of factors like increasing demand for foreign LNG exports, onshoring of industrial activities here in the United States, as well as the important artificial intelligence boom and what it means for energy demand going forward,” said Cook. 

Finally, John Loyd, certified financial planner at The Wealth Planner, says an allocation to energy is “prudent” and recommends an ETF or mutual fund containing a number of energy stocks due to the volatile nature of the sector.

“Given heightened geopolitical risk, AI technologies to help optimize production, along with relatively attractive valuations, energy stocks could have a promising outlook for the second half of 2024,” said Lloyd.