The energy sector, which led the U.S. equity market in 2021 and 2022, likely has more gas in its tank, according to Fidelity’s Matt Fruhan, driven by strong demand and high prices for oil, as well as other commodities.
“A decade’s worth of underinvestment has led to a long-term supply/demand imbalance,” says Fruhan, portfolio manager of Fidelity® Large Cap Stock Fund (FLCSX), explaining his rationale for overweighting energy stocks for the past several years.
Fruhan explains that new drilling projects for oil and natural gas have been disincentivized as the world seeks to transition from fossil fuels to green energy. “This shift to green energy is important to preserve the health of the planet,” Fruhan acknowledges, “but it’s expensive and won’t happen overnight. In the meantime, too little is being produced from traditional fossil fuels to keep pace with strong demand.”
The ongoing war in Ukraine has only exacerbated this supply/demand imbalance, Fruhan underscores, while sharply rising interest rates makes it even costlier to finance energy exploration projects.
With commodity prices remaining elevated, Fruhan notes that energy producers are gushing free cash flow. Still, he says, valuations for energy stocks remain reasonable, while the market appears to be debating how long the sector’s recovery can last.
Fruhan believes the answer depends on the duration of the current energy cycle and, of course, the impact of many unknowns. “For example, a recession in the U.S. could lead to a significant decline in demand for energy,” he says. “Yet, on the other hand, if the Chinese economy opens up after several years of COVID-related restrictions, we could see even more demand for energy.”
Energy stocks within the S&P 500® index, the fund’s benchmark, rose 66% in 2022 before consolidating a bit in early 2023. At the end of January, energy represented more than 13% of the fund’s assets and was the largest sector overweight by a wide margin. Major fund holdings and overweights include Exxon Mobil (XOM), Hess (HES), and Cenovus Energy (CVE).
“Exxon Mobil has benefited from its prior foresight in pursuing capital investments when the price of energy and capital costs were low,” concludes Fruhan of the fund’s top holding. “With these proactive moves, Exxon Mobil has shown itself exceptionally well-positioned for a world of high energy prices and interest rates.”
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Matt Fruhan is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Fruhan manages Fidelity Advisor Capital Development Fund, Fidelity Series Growth & Income Fund, Fidelity Advisor Series Growth & Income Fund, Fidelity Growth & Income Portfolio, Fidelity Advisor Growth & Income Fund, and Fidelity VIP Growth & Income Portfolio. Additionally, he manages Fidelity Mega Cap Stock Fund, Fidelity Advisor Mega Cap Stock Fund, Fidelity Large Cap Stock Fund, and Fidelity Advisor Large Cap Fund. He also co- manages Fidelity Equity-Income Strategy, a separately managed account (SMA).
Prior to assuming his current responsibilities, Mr. Fruhan managed Fidelity Advisor Financial Services Fund, VIP Financial Services Portfolio, and Select Financial Services Portfolio. Previously, he served as the industrials sector leader and managed Fidelity Advisor Industrials Fund, VIP Industrials Portfolio, and Select Industrials Portfolio. Prior to that, Mr. Fruhan managed Select Defense and Aerospace Portfolio, Select Air Transportation Portfolio, and Select Consumer Staples Portfolio. Additionally, Mr. Fruhan worked as an equity analyst following the food and supermarket industries, and in Fidelity’s High Yield Research department following the specialty retail, automotive supply, and transportation industries. He has been in the financial industry since joining Fidelity in 1995.
Mr. Fruhan earned his bachelor of arts degree, cum laude, in economics from Harvard College and his master of business administration degree from Harvard Business School.