Last week, markets beat up energy stocks in an apparent and unprovoked sentiment change. Devon
Energy’s (DVN) lost 16% in value. BP (BP) fell by 11%. The decline in those shares is for different reasons.
BP continued to shun its energy business by investing billions in clean energy. It acquired a 40.5% stake
in a hydrogen project in Western Australia. BP’s generous use of investor money will ultimately destroy
shareholder value.
On June 8, Devon Energy said it would acquire RimRock Oil and Gas leasehold interests. It is paying $865
million. This is immediately accretive to earnings per share. IT will add to Devon’s earnings, cash flow,
free cash flow, and net asset value.
At a macroeconomic level, the slight drop in oil prices led to energy stocks falling. Markets are
anticipating a recession will hurt demand, which hurts economic activity. The recession will cut GDP by
2023. However, the decline will be so small that the energy demand will not slow down.
Investors should take advantage of the temporary weakness in oil prices to consider increasing their
exposure to the sector. Oil is the best hedge against inflation. Gold is not. Oil is a real good that most
industries need to operate.
Disclosure: the author owns shares of BP.
