After a two-year run as the best-performing group in the S&P 500, the energy sector is trailing the broader market this year as the S&P 500 Energy Index is higher by “just” 2.87% year-to-date.
However, that’s not necessarily a knock on energy equities. After all, sector leadership is fluid and frequently shifts from year to year. Plus, exchange traded funds such as the Invesco S&P 500 Equal Weight Energy ETF (RYE) could still be subject to 2023 upside, due in part to energy companies increasingly prioritizing shareholder rewards.
For example, Chevron (NYSE:CVX) last month announced that it is boosting its annual dividend to $1.51 per share from $1.42 and that it will commence a massive $75 billion share repurchase program starting April 1. That’s just one sign of improving balance sheets among the major integrated oil companies.
“The companies have used their record profits and cash flow to significantly reduce debt since 2020. This is credit positive because it gives them greater ability to maintain strong credit metrics through different oil and gas price environments while navigating geopolitical developments and conflicting energy transition pressures, which remain their central business challenges,” according to Moody’s Investors Service.
Importantly, debt levels among the major integrated oil firms, a group that includes Dow component Chevron and Exxon Mobil (NYSE: XOM), are declining and are as low as they’ve been in several years. That’s a critical factor at a time when interest rates are high and poised to rise further, if only on an incremental basis.
“During the past two years the companies have significantly strengthened balance sheets by reducing debt and increasing cash balances from the weak point during the pandemic in 2020,” added Moody’s. “Aggregate debt levels are now also below 2019 levels and have not been this low since 2015 and before.”
Exxon and Chevron combine for 8.63% of RYE’s roster. The other integrated oil giants are BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS-A), and Total (NYSE:TOT). Those are all Europe-based companies and, as such, aren’t members of the RYE portfolio.
Still, it’s relevant that the quintet, regardless of domicile, is exercising prudence when it comes to balance spending and prioritizing balance sheet health. Those factors could pave the way for credit upgrades and allow for shareholder rewards.
“Instead, companies increasingly focused on accelerating shareholder remuneration in 2022 and especially share buybacks, a trend we expect to continue in 2023. At the same time, companies have focused on continued significant oil and gas investments and increased lower carbon investments, but investment growth has been at a slower pace than shareholder remuneration,” concluded Moody’s.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.