ACES - There's More Juice In Energy Stocks
Summary
- U.S. producers look to be in a favorable long-term position to help meet the world’s insatiable demand for energy.
- Electricity producers are increasingly shifting from coal to natural gas and renewable energy sources to lower overall CO2 emissions.
- Many energy-infrastructure companies, including utility-scale renewable-power providers, have inflation-adjustments built in to their fees.
By Paolo Frattaroli
After shining brightly in 2022, the energy sector still appears to have attractive long-term growth potential.
Last year U.S. energy companies were a ray of light for beleaguered equity investors. Despite the sector’s recent strong performance, we believe we are still on the front end of a multi-decade increase in global energy demand and potentially higher levels of inflation that together could keep energy prices elevated, healthy profits flowing and equity values growing.
U.S. producers look to be in a favorable long-term position to help meet the world’s insatiable demand for energy. First, Europe aims to diversify its energy sources in the wake of geopolitical turmoil, while the developing world has shown a growing appetite for exported U.S. oil and natural gas. Second, as the global economy grows, we believe it’s likely that demand for petrochemicals - derived from oil and gas - will grow, too. Petrochemicals are used to make thousands of everyday goods, including phones, pharmaceuticals, automobiles, aircraft, and solar panel components.
Meanwhile, electricity producers are increasingly shifting from coal to natural gas and renewable energy sources to lower overall CO2 emissions - a trend we believe is playing out globally. Recent power crises throughout the world continue to underscore the need for an “all-of-the-above” energy-policy approach, and U.S. lawmakers have shown strong support for investment in renewable energy and electric utilities. Specifically, last year’s Inflation Reduction Act unlocked a host of opportunities - in wind, solar, hydrogen, carbon capture and storage - to help transform the world’s electric grid.
In addition to potentially rising demand, we believe the energy sector could provide an excellent hedge against persistent inflation. Many energy-infrastructure companies, including utility-scale renewable-power providers, have inflation-adjustments built in to their fees. Better yet, many energy companies pay dividends and their shares tend to be relatively uncorrelated with broader equity and fixed-income investments, potentially reducing long-term portfolio volatility within broader asset allocations.
While energy stocks still represent less than 5% of the market capitalization of the S&P 500 Index, we believe the sector has enduring tailwinds that could continue to deliver attractive returns for long-term investors.
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There's More Juice In Energy Stocks