Is there still room left to run in oil and gas stocks?

• The energy benchmark ETF NYSE:XLE (XLE) is up over 60% this year.
• Australian energy stocks have been on a similar skyward run.
• Woodside Energy Group ASX:WDS (WDS) is higher by 64% from the start of the year, is there room left to run in Australian energy stocks?

Year in the books

WDS is up by over 60% from the start of the year. Energy stocks, in general, have had a remarkable run in 2022. The tightness of supply chains and low inventory baselines before the lockdown-exit meant demand has been one step ahead of supply.

As a result, raw material prices have remained elevated throughout the calendar year, including coal, natural gas, and oil. In early June and March, the international crude oil benchmark, Brent, briefly exchanged hands north of 130 USD/BBL, levels not seen since the Global Financial Crisis (GFC).

A quick change of tack and commencement of selling from the US Government special reserve, along with a sharp uptick in the production levels of US private oil companies, quickly dampened the oil prices. They fell back over 30% from the June highs.

Comparison to the historical value

Woodside Energy Group (WDS), Santos Ltd ASX:STO (STO), and Beach Energy Ltd ASX:BPT (BPT) are three of the largest oil and gas producers in Australia.

Their stocks are currently trading on multiples between 7.5-10 times reported earnings. That is on the lower end of historical valuations but comes with some serious caveats.

The International Energy Administration (IEA) has oil demand growth for the next eight years increasing to a total of 4% before declining. That equates to an extremely modest international growth of 0.5% per annum, providing little room for existing and new producers to find new direct customers.

With fewer and fewer chances to create intangibles on customer relationships as buyers dwindle, energy producers of future barrels will be forced to move to general liquidity pools and hope for the best market price, shaving future margins.

Comparison to international value

The largest energy company in the world, Exxon Mobil Corporation NYSE:XOM (XOM), is presently trading at a multiple of nine times reported earnings (PE Ratio).

This is cheaper than some technology stocks that often trade much higher than 20 times earnings. However, there is a key difference, as technology companies are typically growing much faster than oil companies. Without the buffer of growth, future estimated earnings are not worth as much. Today the mean is about 20 for the S&P 500.

As the IEA is presently forecasting that in a few years and less than the nine XOM is currently trading for, XOM’s market will in fact, shrink.

Furthermore, XOM’s multiple of nine is a little higher than the 6’s and 7’s it was trading for between 2010 and 2014. Therefore, there have been deeper sales for XOM stock in the recent past.

Outlook

Energy stocks have had an incredible run in 2022. Might the party be about to wind down? International oil prices have fallen back over 30% from June, yet energy stocks have, on balance, risen over the same time.

Certainly, there have been windows of better value for energy stocks, and despite the concerns over Russian supply displacement, actual shortages have yet to materialise.

US supply growth continues to power ahead just as the world negotiates a possible upcoming recession, and the IEA forecasts tapering demand as we rely more heavily on renewables.

It might be worth taking a wait-and-see approach to energy stock investing right now.