Top 5 Energy Stocks of 2018 by Performance

The energy sector suffered through a painful 2018, tacking on another year of underperformance relative to the broader market. Over the past five years, energy has largely missed the bull market, driven by headwinds such as oil price instability, oversupply concerns, geopolitical risks, and fears of slowing economic growth. Meanwhile, positive drivers such as OPEC supply cuts, renewed U.S. sanctions on Iran, and declining output in Venezuela and Libya have helped bolster the struggling sector. 

The S&P 500 Energy Selector Sector ETF (XLE), an index which includes shares of companies from oil, gas, and consumable fuels, and energy equipment and services, fell 18.7 percent year-to-date (YTD) through Dec. 19, compared to S&P 500’s 6.2 percent decline.

As the decade-long expansion faces a period of heightened volatility and risk, the energy sector could suffer further losses heading into 2019. Bears highlight the potential of risks to outweigh new business opportunities, including increased instability in prices, continued oversupply concerns, and regulatory overhangs. On the other hand, bulls view the sector’s underperformance as an opportunity to buy on the dip, citing sustained (albeit slowed) economic growth, attractive dividend yields, and strong projected earnings growth for energy.

Here are the five energy companies that have managed to outperform the rest, based on their stocks’ performance against the S&P 500 in 2018. This list only included companies with market caps of $1 billion or greater that are listed on the S&P 500.

• Market Cap: $75.1 billion
• 2018 Stock Performance: +18.9%

• Market Cap: $24.6 billion
• 2018 Stock Performance: +11.7%

• Market Cap: $9.9 billion
• 2018 Stock Performance: +11.4%

• Market Cap: $15.3 billion
• 2018 Stock Performance: +9%

• Market Cap: $26.5 billion
• 2018 Stock Performance: -2.0%

ConocoPhillips (COP) is a Houston, TX-based company that explores, develops and produces crude oil and natural gas supplies globally. Shares of ConocoPhillips, up nearly 19 percent in 2018, managed to sharply outperform the S&P 500 sector group thanks to a variety of restructuring and cost-cutting initiatives. For example, the firm succeeded in reducing operating costs by roughly 30 percent, lowered its break-even point to $40 per barrel (with break-even defined as holding production flat and paying the dividend), and sold the majority of its Canadian oil sands and "lower 48" dry gas operations. As a result, the company boasts a strong balance sheet with a low debt level and a solid cash pile.

Bulls cite the firm’s well-diversified production, with its U.S. component steadily increasing. In the quarter ending on Sept. 30, ConocoPhillips posted net income of $1.59 per share, including a $345 million payment related to a settlement agreement. The oil company has a $3 billion share buyback program and a dividend of $1.22 per share annually.

ONEOK, Inc. (OKE) is a leading midstream service provider based in Tulsa, OK. Since acquiring the natural gas business of Koch Industries in 2005, the company is also the owner of premier natural gas liquids (NGL) systems that connect NGL supply in the Mid-Continent, Permian and Rocky Mountain regions with key market centers and an extensive network of natural gas gathering, processing, storage, and transportation assets.

While shares of Oneok faced a period of heightened volatility towards year end, a surge in earnings and cash flows in 2018 have helped the company outperform its peers and the broader S&P 500. Other growth drivers include completed and ongoing expansion projects, a small acquisition, and a ramp-up in volume across its system due to higher oil prices. These factors should help the company reach EBITDA growth of nearly 24 percent YOY in 2018, while cash flow is expected to jump by 34 percent.

HollyFrontier Corp. (HFC) was formed in 2011 through a merger of two small refining companies. The Dallas, TX-based company reports in three segments, including: refining and marketing, which comprise the bulk of its revenue and income; Holly Energy Partners, in which it owns 57 percent of the company; and HollyFrontier Lubricants and Specialty Products. The nearly $10 billion company saw its shares drop-off significantly since November highs amid broader market uncertainty and sector-specific headwinds yet managed to generate an 11.4 percent return YTD.

In November, HollyFrontier posted better-than-expected Q3 results after slightly missing estimates in Q2. The company’s dividend yield is 2.1 percent and the firm is repurchasing shares. While HollyFrontier stock could face volatility amid a larger industry pullback, its operationally-improved refineries, midstream partnership contributions, and high-growth lube segment differentiate the company from its peers.

New York City-based Hess Corp. (HES) is an independent energy company engaged in the exploration and production of crude oil and natural gas. The firm is targeting for 20 percent annual growth in cash flows, backed by a 10 percent increase in total production and a 14 percent increase in oil production. While Hess is set to boost production in the short term thanks to an increase in volumes from the Bakken field in the U.S. and in the long-term with its Guyana oil project, a drop off in oil prices could pose issues for the firm, which reported quarterly losses until the first quarter of 2018.

The reservoirs offshore of Guyana have already led to 10 discoveries for Hess and its partners Exxon Mobil Corp. (XOM) and CNOOC Nexen Petroleum, amounting to estimated recoverable resources of over 5 billion barrels of oil equivalent.

Anadarko Petroleum Corp. (APC) is a petroleum and natural gas exploration and production company headquartered in Woodlands, TX. While the firm owns a midstream business, it predominately operates in the upstream sector as an oil and natural gas driller. Oil sales comprise a majority of the company’s top line. Anadarko posted year-over-year revenue growth of 30 percent in 2017, likely to precede another top line boost in 2018 as the firm expects oil production to increase by 13 percent. 

While this U.S. oil company managed to rank among the top five in its sector, shares failed to post a positive return YTD. Anadarko stock continued its plunge through December, leading a handful of analysts to initiate coverage on shares and lift ratings to "buy" or "outperform," including MKM Partners, Cowen & Co. and Piper Jaffray. Bears cite the company’s vulnerability to volatility in oil prices, its long-term debt, and high capital spending as risks. If the company falls back into the red, it could cut its dividend similar to how it did to in 2016, when it was cut by 80 percent.