Introduction#
Energy stocks have seen a significant increase in value over the last three weeks. However, analysts at Citi believe that investors are focusing on the wrong aspect when evaluating these stocks.
Misconceptions About Oil Prices#
Analyst Alastair Syme pointed out that many investors frequently ask, "What oil price are the stocks discounting?" He argues that this question reflects a misunderstanding. According to Citi, energy stocks should not be viewed merely as reflections of oil prices.
Historical Performance#
Syme highlighted that energy equities have historically performed differently than oil prices suggest. For instance, in 2025, while oil prices dropped by 20%, energy stocks actually increased in value. Conversely, during periods when oil prices were stable, energy equities saw a significant decline. This indicates that oil prices are not the sole factor influencing energy stock performance.
Importance of Long-Term Demand#
Citi suggests that a more relevant factor for evaluating energy stocks is long-term demand for oil and gas. The report indicates that current energy equities are only pricing in a modest annual growth rate of 0.5%, which is below the expected 1.4% growth in global oil and gas demand. This gap suggests that the market may not fully appreciate the essential role of oil and gas in the global economy, especially in light of recent disruptions in the Gulf region.
Valuation Considerations#
Citi also critiques common methods used to value energy stocks, such as focusing solely on Free Cash Flow (FCF) yield. They argue that this approach overlooks important factors like growth potential and the long-term viability of companies. Citi continues to emphasize the importance of having a durable portfolio and recommends companies that are well-positioned for future growth, such as TotalEnergies in Europe and ConocoPhillips in the U.S.