Oil Is the New Sin Stock, and That’s a Boost for the Sector, BCA Says

Is investing in oil stocks a sin? If so, these energy shares are in good, and lucrative, company.

A BCA Research report finds that investing in oil is acquiring, at least in some circles, a risqué allure. And it has helped keep up oil companies’ share prices.

Classic sin stocks are alcohol, tobacco, gambling, cannabis, and firearms. BCA calculates that they have outperformed the broad market in the U.S. by 28% over 50 years. At the same time, quoting a 2017 academic study, these indecent equities are 8% cheaper compared to the rest of the market, as measured by their price/earnings ratios.

Another advantage for sin stocks is that heavy government regulation has erected high barriers to entry, limiting competition and propelling consolidation.

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Many of those attributes are true to oil companies. While frackers have become a presence in the oilfield, the majors still command the most capital, allowing them a lot of leeway. Even before the energy disruptions wrought by Russia’s invasion of Ukraine, the majors had been dialing back their capital spending, even while demand surged.

Sure enough, they have scored good earnings of late, and their stocks are soaring. Exxon Mobile is up 43% this year and Chevon 45%. It doesn’t hurt that their price/earnings ratios are affordable, with Exxon at 16 and Chevron at 21. The S&P 500’s P/E is 25.

A 2021 report by Goldman Sachs showed that market concentration for oil producers tripled from 2018 to 2020, versus the 2010 to 2014 period. The oil firms “now stand at levels consistent with an oligopoly,” the BCA report says.

BCA also quotes Cliff Asness, founder of AQR, on sin stocks’ bad-boy allure: “How does the market get anyone, perhaps particularly a sinner, to own more of something? Well, it pays them! In this case through a higher expected return on the segment in question.”

BCA notes that climate-minded divesting has prompted numerous institutional investors to ditch oil stocks. The report observes that “what is undeniable is that the combination of divestment and the challenging environment of oil have given an attractive discount to energy stocks.”

The study adds that “oil is not tobacco,” in that the economy needs the energy that petroleum generates, and that’s hardly true of cigarettes.

For investors, the extra enticement of naughtiness may be a nice propellant for oil shares, now and in the future.