The first week of May turned out to be brutal for the stock markets, but investors in the energy sector aren't selling. After cooling off a bit in late April, oil and gas stocks are back in the spotlight, with shares of several large companies gaining double digits this week. Here's how some of the top-performing oil and gas stocks are faring as of 1:56 p.m. ET Friday, according to data provided by S&P Global Market Intelligence.
- Energy Transfer (ET 0.80%): Up 4.2%.
- Chesapeake Energy (CHK -0.76%): Up 11.8%.
- Phillips 66 (PSX -1.13%): Up 9.3%.
Earnings season is in full swing, and with oil and gas prices skyrocketing, these companies are minting boatloads of money.
The U.S. Energy Information Administration (EIA) released a stunning piece of data on May 5: It stated that the combined cash from operations from 42 oil and gas exploration and production (E&P) companies in the U.S reached $27.5 billion in the fourth quarter of 2021, or the "largest amount in any quarter" since Q3 2014.
The trend could continue into the first quarter if the latest numbers from some of the oil and gas giants are anything to go by.
Chesapeake Energy, for example, reported record quarterly adjusted free cash flow (FCF) for its first quarter on May 4 as its cash from operations more than doubled year over year. Thanks to its strong cash flows, Chesapeake shareholders will receive $2.34 per share in dividends in June, which include a large, variable-payout component of $1.84 a share.
Although the EIA's data pertained to E&P companies, midstream companies are benefiting as well from rising oil and gas prices. This week, Energy Transfer, which operates nearly 120,000 miles of pipelines, announced solid numbers for Q1. It reported 21% growth in revenue year over year, boosted its dividend by roughly 31%, and increased its 2022 outlook for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to $12.4 billion at the midpoint from a previous estimate of $12 billion.
Phillips 66 already lifted investors' hopes on April 29 when it reported strong sequential growth for Q1 and projected a strong Q2 as well. The refiner generated $1.2 billion in operating cash flow in Q1, repaid debt worth nearly $1.5 billion, and restarted its share-repurchase program.
Now is possibly the best time ever to be an investor in oil and gas stocks.
The West Texas Intermediate (WTI) and Brent crude oil prices rallied nearly 5% and 4%, respectively, this week. Multiple factors were at play. The European Union called for an end to imports of crude oil from Russia by the end of this year, while the OPEC+ group stuck with its plan to raise production only gradually in June despite the surge in oil prices. On top of that, CNN reported the Biden administration is planning to buy a whopping 60 million barrels of crude for the first time in nearly two decades to replenish the country's oil reserves.
The benchmark Henry Hub Natural Gas price, meanwhile, crossed $8 per-metric million British thermal units (mmBTUs) this week to hit 13-year highs. Prices may not cool down anytime soon what with demand for natural gas expected to rise in the summer months even as supply from Russia has been cut off. Energy Transfer is already expanding capacity aggressively to meet high demand for natural gas, especially in the Permian Basin.
As long as prices of oil and gas rise, E&P companies should be able to grow their cash flows and reward shareholders even more richly. That explains why investor interest in oil and gas stocks is so high right now. Chesapeake Energy has even found itself within the light of an activist investor: This week, Reuters reported activist asset manager Kimmeridge has purchased nearly two million shares in the oil giant and is initiating talks with Chesapeake's management to restructure the company to unlock more value for shareholders.
Phillips 66 management, meanwhile, just emphasized how laser-focused the company is on boosting shareholder returns. It is also so confident about generating excess cash in the near future that management believes it will not only be able to repay more debt and repurchase shares but also increase dividends.
Long story short, the global macroenvironment hugely favors the oil and gas market right now, and that's all these oil and stocks require to sustain momentum.