Demand for energy stocks to ‘dramatically increase,’ Truist analyst says (NYSEARCA:XLE)

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Investors seem ready to starting buying energy stocks (NYSEARCA:XLE) again as earnings start rolling in, looking to boost their weightings in the sector given healthy free cash flows, Truist analyst Neal Dingmann said Monday, favoring the sector because it remains cheap and has positive earnings revision trends.

Following talks with a number of E&P companies as well as several investors, Dingmann said he believes “demand for energy stocks is about to dramatically increase” as earnings reports come in.

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Dingmann said his conviction comes after being “on the road extensively” with six E&P companies – (APA), (CPE), (ESTE), (MTDR), (MUR) and (NOG) – all rated Buy at Truist.

The analyst expects about a third of the companies he covers will report Q3 free cash flow below Q2 levels, but FCF yields will still be among the highest of any group.

The SPDR Energy Select Sector ETF (XLE) has gained 19.2% over the past three months and 47.3% YTD, compared to the S&P 500, which has lost 4.9% in the past three months and 22.9% for the full year.

But even as utilities stocks (NYSEARCA:XLU) rose Monday, Truist analysts say it is still not a good time to buy utility stocks, cutting the outlook for the sector to Neutral from Overweight, citing mixed fundamentals and valuations as well as a recent weakening in technical trends.

The Utilities Select Sector SPDR ETF (XLU) has climbed to ~$77/share three times this year, only to fall victim each time to selling pressure at that level that knocked the price down; the ETF currently is at ~$63 after dropping from $78 in mid-September to a YTD low near $61 in early October.

Even after the recent decline in utility stock prices, the Utilities Select ETF’s dividend yield is still a meager 2.85%, which is not enough to attract buyers when 10-year U.S. Treasurys yield ~4%.

Utilities (XLU) should recover because of “two demand related catalysts: global warming and greater EV adoption, as well as the Biden administration’s ability to pass clean energy and infrastructure legislation,” Michael Fitzsimmons writes in an analysis posted on Seeking Alpha.