With just a few days left in 2021, it looks like the energy sector will complete one of the more memorable redemption acts on record and finish this year as the best-performing group in the S&P 500.
Of course, past performance isn’t a promise of future returns, but some market observers believe that energy stocks can deliver more upside in 2022. If that prediction is accurate, it could benefit a variety of exchange traded funds, including the VanEck Vectors Energy Income ETF (EINC).
EINC, which tracks the MVIS North America Energy Infrastructure Index, is an income-driven play on the energy patch. That much is evident by a 30-day SEC yield of 5.15%. However, that’s not restraining upside for the VanEck fund, as EINC is higher by 28% year-to-date. What augurs well for EINC in 2022 is the fact that many midstream operators — the companies on the EINC roster — are obliging investors’ demands.
“Energy’s strength follows a recovery in oil and gas prices, but also marks a significant shift in companies’ business models. Investors are now demanding healthier balance sheets, restrained spending and capital return in the form of dividends and buybacks,” reports Pippa Stevens for CNBC.
Another potential catalyst for energy equities, including midstream fare, in the new year is the fact that, despite this year’s impressive showing by the group, investors remain chastened by oil’s coronavirus bear market and haven’t come rushing back to the sector as of yet.
“The sector remains under-owned – due to concerns around environmental, social and governance factors and the energy transition – but Wall Street analysts say there’s upside in 2022 for companies that remain disciplined after a transformational year for the industry,” according to CNBC.
Translation: If energy equities carry some of this year’s momentum into 2022, some professional investors may have no choice but to acknowledge that the sector is on firm ground and worth owning.
Supporting the EINC income proposition is the way that energy companies are emphasizing prudence rather than rushing to spend cash simply because oil prices are high.
Prior oil bear markets, including 2020’s, “ushered in a new period of pervasive capital discipline and rising shareholder returns. … We expect this strategic shift away from growth toward FCF [free cash flow] to hold, supporting further re-rating in the sector’s still discounted valuation,” notes Morgan Stanley.
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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.