The Boom in Oil Stocks Could Be Over

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A Shell service station in London.

Justin Tallis/AFP via Getty Images

Exxon Mobil



report earnings this coming week—but investors have more to worry about than whether they’ll make their numbers.

After a decade of underperformance, energy stocks have led the market higher in 2021, rising an average of 30%. But on Thursday, one analyst, HSBC’s Gordon Gray, threw in the towel on big oil stocks, downgrading Chevron (ticker: CVX),

Royal Dutch Shell

(RDS.A), and


(E) to Hold from Buy. His worry: This might be as good as it gets.

The problem starts with the transition to renewable energy. Big oil companies are doing what they can, with large European ones like Shell buying into wind- and solar-power projects, and U.S. ones investing in techniques such as carbon capture and storage. But they’re moving slowly, so investors would be better off investing elsewhere to play clean-energy themes.

“[It] is far too early for many investors to consider them plays on the transition theme,” Gray writes. “Our analysis shows that the oil majors lag at least a decade behind utilities and autos on relative exposure to clean energy.”

Investors want oil companies to put money into renewable energy—but they’re also concerned about the returns from those businesses. While Gray thinks those worries are overblown, he expects them to weigh on the stocks. His one Buy rating now is on French energy giant


(TTE), which has a high dividend and is making a particularly fast transition to renewables.

Gray acknowledges that the companies have improved in terms of generating cash and consistent profits. They’re spending more on debt reduction and dividends instead of costly low-return projects like they did in the past—and they’ve been rewarded for it. Those days seem to be over, however. The stocks haven’t even gotten a bump from the latest rise in oil prices, even falling relative to the overall market during the last $20 rise in Brent crude prices.

The major oil companies “have more downside sensitivity than upside sensitivity,” Gray says. “Put simply, the stocks are currently likely to underperform the market both ways: the oil majors fall more than the market when market indices are down, and rise less when the market is up.”

Some will argue that the stocks look cheap. Exxon (XOM), for instance, trades at 12.8 times 12-month forward earnings, below its five-year average of 25.7, while Chevron trades at 14.2 times, below its average of 32.1 times. But rapid change can make valuing an industry difficult, and while the stocks look inexpensive, it’s hard to know what the “correct” multiple is when an industry is shrinking fast, Gray says.

Gray’s perspective is among the bleakest on Wall Street. Other analysts continue to like many big oil stocks, and see energy as one of the better sectors for the second half of the year. J.P. Morgan analyst
Phil Gresh
argues that the energy sector should outperform the S&P 500 for the rest of the year as demand continues to pick up along with travel. Among his favorite stocks is Exxon, which he thinks can quickly pay off debt as it sells assets and sees its core returns improve. He rates it at Overweight with a $74 price target, up 30% from Friday’s close of $57.04.

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

Beats would be great. But keep a close eye on what the companies say about renewable energy. It could trump everything else.

Write to Avi Salzman at

William Murphy

William Murphy

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