By Jinjoo Lee
The world is in the middle of a historic oil crisis, yet the biggest bargains on Wall Street can be found in U.S. energy stocks.
After the latest round of oil-producer earnings, analysts have raised their profit expectations for the sector. They now expect the energy stocks in the S&P 500 to generate 58% more earnings per share in 2026 than they did before the Iran war began, according to FactSet.
Yet energy stocks, just like the rest of the market, have been reacting to every headline suggesting a potential breakthrough in negotiations between the U.S. and Iran. The price of the energy basket in the S&P 500 is just 2% higher than where it was before the war, when oil futures were close to $70 a barrel and the world had a supply glut. Today, oil prices are closer to $100 a barrel and the world has lost roughly a billion barrels of oil supply.
As a result, the sector that most directly benefits from the Strait of Hormuz closure has undergone the biggest earnings-multiple contraction since the start of the war. For investors lacking exposure to energy, this may be a good time to buy the dip.
True, the sector was trading at high multiples before the conflict began. Even so, the selloff in energy equities puts the group at less than 14 times forward earnings, making it 36% cheaper than the overall index. That is steeper than its 29% discount on average over the past decade.
Energy companies' latest earnings commentary should have been a bullish sign for the stocks. Despite the surge in oil prices, oil majors and U.S. shale producers aren't deviating much from their existing spending plans. This means there isn't going to be a flood of oil supply to damp prices.
Market uncertainty is one reason why companies aren't committing more capital. But there is also a structural reason: U.S. shale is a maturing resource with its best days of growth behind it. "If your company has 10 to 12 years of inventory and you add 10% to your activity now, you all of a sudden have maybe 10 years or less [of inventory]. That becomes an issue," said Scott Hanold, equity analyst at RBC Capital Markets.
Some producers did signal more production, but not nearly enough to move the needle. Diamondback Energy, one of the largest Permian producers, raised its annual oil production guidance by 10,000 to 20,000 more barrels a day. By comparison, the Strait of Hormuz closure is removing some 13 million barrels a day from the market.
Meanwhile, energy companies' cash allocation plans look more investor-friendly. In late 2021 and 2022, when oil prices were high, U.S. producers committed to spend excess cash flow on special, or "variable" dividends. Some of these payouts were formulaic, tied to a percentage of a company's free cash flow. These acted as a curb on producers' capital expenditures, helping reassure investors that companies wouldn't return to their habit of excessive drilling.
Yet these payouts also prevented companies from using excess cash to do other important things, such as paying down debt or buying back stock opportunistically. This time, producers including Diamondback and EOG Resources have promised to do those very things while shelving variable dividends. This is a more prudent use of cash and should help add more long-term shareholder value, notes Arjun Murti, a partner at Veriten. "This time around, there's an opportunity to really get to a fortress balance sheet," he said.
Energy companies are likely to generate healthy cash flow in the coming quarters. Even if the Strait of Hormuz reopens, oil prices probably won't fall to preconflict levels, unless there is some kind of sharp economic downturn. Resuming shipping and restarting oil wells could take some time, especially in countries with older oil fields such as Iraq. Meanwhile, there will be elevated demand from governments looking to refill depleted oil stockpiles and protect themselves against future shocks. In short, there is no going back to the prewar status quo for oil markets.
As excess cash accumulates in the coming quarters, energy companies will no doubt face more questions around how they plan to use all of it. In a world where most companies wrestle with rising input costs, too much cash will be a good problem to have. And in an expensive market, energy stocks look like a rare pocket of good value.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
May 12, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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