While Wall Street celebrated a 20% surge in the S&P 500 during 2025, the energy sector limped across the finish line with just 7% returns. Oil prices spent much of the year under pressure as oversupply fears dominated the narrative, and investor sentiment toward traditional energy companies hit multi-year lows.

For most investors, that's a signal to stay away. For contrarians, it's exactly the setup they've been waiting for.

The Case for Energy in 2026

The EIA's latest short-term outlook projects West Texas Intermediate crude will average $65.32 per barrel in 2025, declining further to $51.42 per barrel in 2026. On the surface, that sounds bearish. But here's what those forecasts miss: low prices are forcing discipline on producers, squeezing supply, and creating a rare setup where sentiment and fundamentals are deeply misaligned.

"Low prices are forcing discipline, squeezing supply, and creating a rare setup where sentiment and fundamentals are deeply misaligned. This offers both income and upside for patient investors."

— Energy sector analyst

Consider what happened in 2025: U.S. oil producers, burned by previous boom-bust cycles, refused to aggressively expand production despite a still-functioning economy. Capital discipline has become the watchword of the industry, with companies prioritizing shareholder returns over growth at any cost.

The Undervalued Opportunities

According to Morningstar analysis, several major energy companies are trading well below their intrinsic value:

  • Cheniere Energy: Earns a wide economic moat rating and looks 21% undervalued relative to a $241 fair value estimate. The company sits between North American natural gas producers and global LNG consumers—a strategically advantageous position as LNG demand grows globally
  • Baker Hughes: The oil and gas equipment and services company is 15% undervalued relative to a fair value estimate of $53 per share
  • SLB (formerly Schlumberger): The premier global oilfield-services company has over three-fourths of its business exposed to markets outside North America, providing geographic diversification

The Refining Sweet Spot

While low oil prices hurt producers, they're a gift for refiners. Companies that process crude into gasoline, diesel, and jet fuel see their input costs fall while retail prices remain relatively stable—expanding margins in the process.

  • Valero Energy: A leading independent refiner with 15 refineries and combined refining capacity of 3.2 million barrels per day
  • Phillips 66: Recognized crude utilization of 99% in Q3 2025—the highest since 2018—and is well-positioned to capitalize on lower oil prices

The LNG Supercycle Is Just Beginning

Goldman Sachs' December report indicates global LNG supply is set to increase 50% by 2030, with the U.S. as the primary driver. Analysts consider 2026 to be "the last year of the oil supply wave and the start of the LNG supply wave."

This transition creates distinct winners and losers. Companies positioned in LNG infrastructure and export facilities stand to benefit enormously, while those solely focused on domestic oil production may continue to struggle.

Dividend Stability in an Uncertain World

Energy companies have become dividend aristocrats in their own right:

  • Chevron: Has increased its dividend for 38 consecutive years and expects to grow cash flow by an additional $12.5 billion in 2026
  • Devon Energy: Is bringing online approximately 90 gross operated wells in Q4 and aims to cut $100 million in costs in 2026 relative to 2025

For income-focused investors, energy sector dividends offer yields well above the S&P 500 average, with many companies trading at single-digit price-to-earnings ratios.

The Risks to Consider

The contrarian case for energy isn't without challenges:

  • Demand uncertainty: Global economic slowdowns, particularly in China, could further pressure oil prices
  • Policy headwinds: While the Trump administration has been generally supportive of fossil fuels, state-level policies and long-term energy transition pressures remain
  • OPEC+ dynamics: The cartel's production decisions remain a wild card that could swing prices dramatically in either direction

The Bottom Line

Energy is entering 2026 as perhaps the most contrarian sector in the market. While technology stocks trade at nosebleed valuations and everyone piles into AI plays, traditional energy companies offer a combination of value, income, and potential upside that's increasingly rare.

The sector won't outperform if oil prices collapse to $40 or if a global recession crushes demand. But for investors who believe the economy will remain resilient and that energy demand isn't going away anytime soon, today's prices may look like bargains in hindsight.

As one veteran energy analyst put it: "When everyone hates a sector, that's usually when you want to start paying attention."