(By Mani) Most energy stocks have lagged the S&P 500, which is up 4 percent year-to date, on falling oil prices and the lowest natural gas prices in a decade. The exceptions were independent refiners, which benefited from wide Brent-WTI differentials, reduced global supply from refinery shutdowns, and record product export volumes.
Oil prices dropped $30 from their $128 peak in March on reduced potential impact of Iranian exports and weak demand on a worsening European economic outlook.
"Despite the recent pullback, we believe oil prices remain inflated by speculation, but the downside risk in our view is greatly reduced," Oppenheimer analyst Fadel Gheit said in a research note.
On the other hand, although natural gas prices surged recently, barring a sharp production decline or demand increases, it could remain depressed longer than expected, leading to industry consolidation.
In a declining oil and gas price environment, risk-averse investors usually favor the stocks of companies with large market value, strong balance sheets, positive free cash flow and above-market dividend yields. The stocks of major integrated companies, which usually benefit from investors' flight to quality, have outperformed the E&Ps this year, and this trend is expected to continue in the near term.
Income investors may seek dividend benefits from large oil and gas firms. Growing the dividend is a key goal for large companies as it impacts their stock performance. Among others, Royal Dutch Shell (NYSE:RDS), BP plc (NYSE:BP), ConocoPhillips (NYSE:COP) and Chevron Corp. (NYSE:CVX) have the highest dividend yield. However, most yield investors value dividend growth more than higher yield, as it underscores management confidence in the company's financial outlook.