By Paul R. La Monica
Energy stocks are holding their own this year overall, mainly due to strong gains for natural gas companies. But drill, baby, drill. Oil stocks, which have underperformed, could soon start gushing as well.
Even though the Energy Select Sector SDPR exchange-traded fund is up 4% in 2025, beating the 1.7% the gain for the S&P 500, it's more nuanced than that. Oil stocks, particularly oil services and exploration and production companies, have been big laggards. But natural gas companies and refiners have shined.
Natural gas firms EQT and Expand Energy were the top and third-best stocks in the XLE energy ETF through Monday's close, gaining 26% and 19% respectively. Refiners Marathon Petroleum and Valero Energy ranked second and fourth-best, with returns of 20% and 12%.
Meanwhile, Halliburton, APA, Occidental Petroleum, Diamondback Energy and Schlumberger were among the worst performers in the ETF, losing between 6% and 16% year-to-date through Monday.
So what's next? Energy analysts at Goldman Sachs said in a report Tuesday that they "remain bullish on both natural gas and refining" stocks, particularly EQT and Valero.
The Goldman analysts pointed out that they like EQT "given its lower cost structure" as well as the perception that it has "greater leverage to the data center theme," which has led to massive demand from energy producers. As for refiners, the Goldman analysts said they like Valero best, due to its high quality assets in the Gulf Coast.
But it might be time for oil stocks to catch up with their natural gas peers.
The Goldman analysts think that some oil stocks are set to rebound, even though investors will have to be "willing to look through near-term crude volatility." Some of this year's laggards, most notably Diamondback Energy and Halliburton, are two top picks. Both stocks trade for only around 10 times earnings estimates.
Investors shouldn't ignore some of the larger, diversified oil companies though. Brian Mulberry, a client portfolio manager with Zacks Investment Management, told Barron's that Exxon Mobil and ConocoPhillips should still be attractive as long as oil remains above $60 a barrel.
WTI crude prices are currently hovering around $75, partly due to concerns about supply in light of the Israel-Iran military skirmish. But Mulberry also thinks oil prices have room to run as recession fears have started to wane.
"We're not seeing a sharp downturn in oil demand," he said.
Most energy stocks look fairly attractive right now though. The S&P energy ETF currently trades at just 16 times earnings estimates for next year, below the multiple of 20 for the S&P 500. Nicholas Colas, co-founder of DataTrek Research, said in a report Tuesday that the valuations for energy stocks "certainly qualifies as statistically cheap."
And analysts at Bespoke Investment Group noted in a report Tuesday that the technicals look encouraging for energy stocks as well.
"Energy now has the highest percentage of stocks above their 50-day moving averages," the Bespoke analysts said, adding that this is particularly encouraging "since the sector's valuation relative to the last ten years is on the low side compared to the rest of the market."
Investors finally seem to be catching on to the fact that there are plenty of bargains among oil and gas companies as well. Jill Carey Hall, equity and quant strategist at Bank of America Securities, said in a report Tuesday that the firm had the biggest inflows into energy ETFs since October 2023 last week due to the Israel-Iran conflict.
So keep an eye on the Middle East. If crude prices continue to climb, some of the beaten down oil services and E&P companies may start to catch up to this year's natural gas winners.
Write to Paul R. La Monica at paul.lamonica@barrons.com
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June 17, 2025 14:46 ET (18:46 GMT)
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