By Avi Salzman

The energy market hit a rare milestone in 2025: For the first time this century, oil stocks rose in a year when the price of the commodity was down more than 10%.

The State Street Energy Select Sector SPDR ETF, which tracks the energy stocks in the S&P 500, is up about 3% this year. While that is well behind the S&P 500's 17% gain, the rise in energy stocks is still notable given the context.

West Texas Intermediate crude, the benchmark U.S. oil price, is down 19% this year. Normally, in a year like this, energy stocks, which are dominated by big oil names, fall significantly. In 2020, oil fell 21% and the energy ETF fell 37%.

The divergence between oil prices and stocks this year reflects a few things. The ETF that tracks oil stocks is dominated by America's two megamajors, Exxon Mobil and Chevron, whose stocks are up 12% and 3% respectively this year. Both of those stocks have gained ground despite the decline in oil prices.

The main reason is that investors have become willing to pay even more for their future cash flows, even if current cash flows aren't great. Valuations are up in part because the Trump administration has made it more profitable to drill for fossil fuels, and less likely that those energy sources will be replaced soon.

But it isn't all about more favorable regulatory treatment. Both of the U.S. megamajors have been focused on cost cutting and stock buybacks, which can help their earnings per share even when oil prices fall. By cutting costs, the companies have lowered their break-even costs: the oil price they need to make money on each barrel they sell.

They have also boosted their dividends at a time when other companies have been stingier with their payouts. Chevron stock has a dividend yield of 4.5%, and Exxon yields 3.4%, and both dividends are considered safe even at today's weak oil prices.

The big oil companies are even outyielding utilities, which had previously been considered the best place to park cash to receive steady dividends. Now the average utility yields about 2.7%.

Both companies have also benefited from strong results in segments outside of producing oil. Refining oil into fuel, part of the companies' "downstream" operations, has been a profitable business for both companies this year, in part because Ukraine has destroyed several Russian refineries, reducing total global capacity.

"Both of these companies have benefitted from their low upstream break-even prices and solid turnaround of downstream businesses," wrote William Blair analyst Neal Dingmann in an email to Barron's.

But what has really boosted the stocks is that investors have grown more optimistic about their future results. The valuation of both companies has taken a step-change higher this year.

For the past five years, Chevron has traded for an average of 13.6 times the earnings expected over the next four quarters, according to FactSet. Now it is trading for 20.3 times.

Exxon trades at 16.6 times, after averaging a multiple of 12.9 times over the past five years. ConocoPhillips, the third-largest company in the ETF, has also been trading at a higher multiple: 15.1 times versus its historical average of 12.9 times.

Investors are optimistic about the companies for several reasons. For one thing, the One Big Beautiful Bill passed by Congress this year included billions of dollars worth of tax breaks and other benefits for the industry. Oil companies will pay lower royalty rates to drill on federal land, get expanded tax breaks for capturing and reusing carbon, won't have to pay fees for emitting methane for years, and will get much more favorable tax treatment for drilling than under previous law.

Oil producer Occidental Petroleum has quantified its financial benefits from the bill at between $700 million to $800 million in 2025 and 2026 alone.

The Trump administration has also rolled back environmental rules in a move that will ensure gasoline-powered cars stick around for longer. Electric-vehicle tax breaks are gone, and automobile fuel-efficiency standards are being rolled back.

For years, oil stocks were valued as if their core businesses were likely to go away over the next decade. Now, that timeline has been extended. Oil demand will eventually decline, but these companies now look likely to pump out cash for many more years. And investors are happy to pay up for them.

Write to Avi Salzman at avi.salzman@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 24, 2025 13:09 ET (18:09 GMT)

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