The boom in oil stocks may be over

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A Shell service station in London.

Justin Tallis / AFP via Getty Images

Exxon Mobil



report profits the week ahead, but investors have more to worry about than whether they will be doing their numbers.

After a decade of underperformance, energy stocks led the market higher in 2021, averaging 30% higher. But on Thursday, analyst Gordon Gray of HSBC threw in the towel on major oil stocks, downgrading Chevron (ticker: CVX),

Royal Dutch Shell

(RDS.A), and


(E) to hold back to buy. His worry: it might be as good as it gets.

The problem begins with the transition to renewable energy. The big oil companies are doing what they can, with the big Europeans like Shell buying into wind and solar energy projects, and the Americans investing in techniques like carbon capture and storage. But they are moving slowly, so investors would be better off investing elsewhere to play on clean energy themes.

“[It] is far too early for many investors to consider them transition-themed games, ”Gray writes. “Our analysis shows that the oil majors are at least a decade behind utilities and autos in clean energy exposure.”

Investors want oil companies to invest money in renewables, but they are also concerned about the returns of these companies. While Gray thinks those concerns are overblown, he expects them to weigh on stocks. Its unique purchase rating is attributed to the French energy giant


(TTE), whose dividend is high and which is making a particularly rapid transition to renewable energies.

Gray acknowledges that businesses have improved in terms of generating cash flow and consistent profits. They’re spending more on debt reduction and dividends instead of expensive, low-yielding projects like they’ve done in the past, and they’ve been rewarded for it. Those days seem to be over, however. Stocks didn’t even benefit from the latest rise in oil prices, and even fell relative to the wider market in the last $ 20 rise in Brent crude prices.

Big oil companies “are more sensitive to the downside than to the upside,” says Gray. “Simply put, stocks are currently likely to underperform the market in either direction: Oil majors fall more than the market when stock indexes are going down and rise less when the market is going up. “

Some would say stocks look cheap. Exxon (XOM), for example, is trading at 12.8 times 12-month futures earnings, below its five-year average of 25.7, while Chevron is trading at 14.2 times, below its average of 32.1 times. But rapid change can make it difficult to value an industry, and while stocks look cheap, it’s hard to know what the “correct” multiple is when an industry is contracting rapidly, Gray says.

Gray’s perspective is one of the darkest on Wall Street. Other analysts continue to appreciate many large oil stocks and see energy as one of the best sectors for the second half of the year. JP Morgan analyst Phil Gresh says the energy sector is expected to outperform the S&P 500 for the remainder of the year as demand continues to accelerate with travel. Among his favorite stocks is Exxon, which he says can pay off debt quickly as it sells assets and sees its base returns improve. He rates it at Overweight with a target price of $ 74, up 30% from Friday’s close of $ 57.04.

Exxon is expected to report earnings of $ 1.01 per share on sales of $ 64.6 billion, while Chevron is expected to report profit of $ 1.59 on sales of $ 36.3 billion.

Beats would be awesome. But keep a close eye on what companies are saying about renewable energy. It could trump all the rest.

Write to Avi Salzman at

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Felix J. Dixon