The energy sector has rotated back into leadership, with big S&P 500 components such as Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX) and Schlumberger Ltd. (NYSE: SLB) trading to the upside in recent weeks. 

The performance of exchange-traded funds such as the United States Oil Fund (NYSEARCA: USO) and ProShares K 1 Free Crude Oil Strategy ETF (BATS: OILK) illustrate the broad industry-wide rally in the past couple of weeks.

One development driving prices higher: Saudi Arabia and Russia said they would extend voluntary production cuts through the end of the year. Analysts already forecast tight supply in the near-to-medium term. 

Following that news, Goldman Sachs said oil prices could reach $107 next year if those cuts remain in place.  

Machinery & Equipment Leader Posting Gains

Among sub-industries, the machinery and equipment group is leading, with S&P 500 component Baker Hughes Co. (NYSE: BKR) being a top sector performer. 

The company, which provides drilling, completion, and production-related services, as well as technologies, is up 2.80% in September, and has notched a three-month increase of 22.33%. 

Baker Hughes is set to report third-quarter results on September 30, with analysts eyeing earnings of 39 cents a share on revenue of $6.52 billion, which would be year-over-year increases. 

Analysts see the company earning $1.54 a share this year, an increase of 68%. 

The Baker Hughes chart shows the stock holding above its 50-day average since June 1.  

Explorers & Producers Exploring Price Increases

The U.S. oil and gas exploration and production sub-industry has also been rising in the past six months, and is now among top performers. S&P 500 components Diamondback Energy Inc. (NASDAQ: FANG) and Pioneer Natural Resources Co. (NYSE: PXD) are sector leaders. 

Diamondback is in the business of acquisition, development, exploration, and production of oil and natural gas reserves, primarily in the Permian Basin. The stock is up 5.63% in the past month and up 19.84% in the past three months. 

Diamondback reported second-quarter results on July 31, earning $3.68 a share on revenue of $1.92 billion, which marked declines on both the top and bottom lines. 

Analysts see earnings declining this year to $17.03 a share, down 29%. 

So what’s up with the big price gains? 

Dividend Attractive Feature For Buyers

Diamondback’s analyst ratings show a consensus view of “moderate buy” with a price target of $177.35, an upside of 14.51%. 

Although the company pays a dividend with a yield of 2.17%. MarketBeat’s Diamondback Energy dividend data shows a five-year track record of increasing the shareholder payout.  

In 2022, the company kept production relatively flat, using excess cash flow for debt repayment and return to stockholders rather than expanding its drilling program.

In its 2022 annual report, the company said it intends to distribute 75% of its quarterly free cash flow to stockholders. 

“Our capital return program is currently focused on our sustainable and growing base dividend and a combination of stock repurchases and variable dividends,” it said. 

In other words, despite an expected decline in earnings, investors are on board with a return of capital. 

Pioneer Holding Above 50-Day Average

Meanwhile, Pioneer, which is in a similar business as Diamondback, has gained 3.91% in the past month and 19.54% in the past three months. 

A look at the Pioneer Natural Resources chart will show the stock trading above its 50-day average since mid-July. As with Diamondback, Wall Street sees an earnings decline coming up, but that’s not stopping buyers. Analysts expect earnings growth to rebound next year. The prospect of future growth is frequently a drawing card for investors hoping to snap up shares valued lower than they might be in a year or two.  

In addition, the Pioneer Natural Resources dividend yield of 2.09% is also attracting investment capital.

It’s true that the energy sector is subject to the whims of the commodities market, as well as the broader economy. However, it’s also true that investors should constantly monitor sector performance to get an understanding of which areas could juice up returns.