After ranking as the best-performing sector in the S&P 500 last year, energy is up to its old tricks again to start 2022, and that’s a good thing for investors because the S&P 500 Energy Index is up 24.14% year-to-date.
With that in mind, it’s safe to say that the energy sector has momentum. Speaking of momentum, there’s the Invesco DWA Energy Momentum ETF (PXI). After setting an exhilarating pace last year, PXI, which tracks the Dorsey Wright® Energy Technical Leaders Index, is higher by 19% to start 2022.
PXI’s early 2022 bullishness could prove to be more floor than ceiling amid vibrancy in oil markets and as some market observers point to tailwinds for energy equities.
“IHS Markit projects US oil production will surpass 12.6 million b/d by year-end 2022, nearing its previous all-time high of 12.8 million b/d recorded in 2019. Entry-to-exit production is expected to rise by more than 850,000 b/d during 2022, driven almost entirely by output gains in the Permian Basin, Bakken, and deepwater Gulf of Mexico,” according to the research firm.
That’s relevant to PXI because many of the exchange traded fund’s 45 holdings are shale producers, some of which maintain dominant positions in the major North American shale plays. Producers are moving to boost output to take advantage of high oil prices.
“Onshore Lower-48 rig counts reached nearly 650 in January 2022, up from less than 250 in mid-2020. IHS Markit expects rig activity will surpass 700 in mid-2022 before ultimately climbing to 760 by year-end 2023. All told, upstream capex is projected to reach nearly $100 billion during 2022, up from $67 billion in 2021,” adds IHS Markit.
While PXI components are upping spending, investors should also note energy companies are remaining prudent relative to bygone eras of higher oil prices. Additionally, some of the higher quality operators in this space are generating significant cash flow. Combine those factors and it’s a constructive environment for shareholder rewards in the energy sector.
“US operators are on track to generate a cash surplus of more than $70 billion during 2022. Although this sum is largely in line with 2021 totals, distribution will disproportionately benefit shareholders in 2022,” notes IHS Markit.
PXI has a distribution rate of 0.82%, implying ample room for dividend growth, particularly if oil prices remain high and spending continues to be mostly restrained.
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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.