Can Small-Cap Energy Stocks Rise When Oil Prices Fall?
Sagging oil prices have driven many investors away from the energy sector, but we see opportunities in companies that don’t depend on rising prices.
Key Takeaways
Oil prices have dropped in 2025 due to oversupply and predictions of reduced demand from an economic slowdown.
Oil prices can affect many energy stocks, making some investors skittish about the sector.
We take the opposite view by seeking energy companies less affected by oil price fluctuations.
The potential for rising prices in today's market impacts everyone — nations, businesses and consumers — for nearly everything except the one thing everyone relies on: oil.
West Texas Intermediate crude oil prices have fallen 15% this year as of May 22.1 The main factors contributing to this decline include:
President Donald Trump’s unpredictable and severe tariff policies, which have led most economists to fear a recession and decreased oil demand.
The OPEC+ oil cartel, which controls 40% of the world’s oil supply, has boosted its production quotas.2
Falling oil prices pose a challenge for most energy companies. Declining commodity prices can reduce revenues, profit margins and earnings. Additionally, the oversupply of oil in the market may lead exploration and production companies to halt their extraction efforts.
While many investors are fleeing energy stocks due to these dynamics, we take a contrarian view. We see this as an opportunity to identify small-cap companies with the potential to perform well despite fluctuating oil prices. We’re focused on finding stable, high-quality, dividend-paying stocks in the sector.
Our Take on the Energy Sector in 2025
We haven’t always been fans of the energy sector. In the past, many energy companies handled their own oil and gas exploration and production instead of outsourcing these tasks to specialized firms. This approach was costly and didn’t provide much value to shareholders. As a result, small-cap energy stocks substantially underperformed broader measures of the small-cap market from 2009 to 2020.3
More recently, we’ve noticed a change in how companies do business. Corporate boards, perhaps hoping to attract more interest from investors, have designed executive compensation packages to reward improved financial outcomes rather than oil and gas production goals.
Money is a strong motivator. Around 2020, energy companies started returning value to shareholders by using free cash flow to increase dividends and repurchase shares.4 Since then, small-cap energy stocks have improved their performance relative to the broader market.
What Makes Energy Companies Resilient?
When most people think of energy companies, they typically think of massive oil producers like ExxonMobil, Chevron or Shell.
While these companies are giants, they’re merely three among the broad landscape of businesses involved in extracting raw oil from the Earth’s crust and turning it into fuel for cars or lubricant for engines.
This diverse sector includes companies that manufacture parts for machines that extract oil from the ground or pipes that transport oil from one place to the next, to name two examples among hundreds.
Many energy companies are significantly affected by oil prices, which exposes them to unpredictable boom-and-bust cycles influenced by factors that are often beyond their control.
However, within the broad energy landscape, we seek companies less affected by commodity prices or that have discovered ways to mitigate their exposure to price volatility.
Some oil producers, including companies that drill for oil both onshore and offshore, have created hedging strategies to provide a buffer against downturns in oil prices and the overall economy.
Other firms develop equipment like artificial lifts to help oil companies improve their production. If these products are involved in production rather than exploration — the process of finding places where oil reserves exist — they’re less affected by changes in oil prices.
Another example is midstream companies, which build and own pipelines that transport gas and oil. These companies make money as long as oil runs through their pipelines, regardless of how much a barrel of oil fetches on the market.
Navigating the Energy Sector Amid Oil Price Swings
Forecasting commodity prices, especially oil, is quite challenging. The current environment adds to this complexity, particularly with the unpredictable nature of Trump's tariffs, which can change at any moment.
The dynamics within OPEC+ are becoming increasingly hard to predict. Saudi Arabia previously aimed to maintain oil prices above $90 a barrel to support broader shifts toward a market economy and reduce its reliance on oil. Countries like Kazakhstan are prioritizing their own goals over the cartel's quotas, which is leading to an increase in market supply.
Given this context, we will continue to focus on companies whose performance is less affected by market cycles and oil prices.
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FactSet. West Texas Intermediate (WTI) crude is a high-quality, light and sweet crude oil that serves as one of the main global oil price benchmarks.
OPEC is the Organization of the Petroleum Exporting Countries. OPEC+ includes the 13 OPEC member nations and 10 other major oil exporters.
FactSet, based on the Russell 2000® Value Index.
Free cash flow refers to the cash that remains after all operating and capital expenses have been paid.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Dividends and yields represent past performance and there is no guarantee that they will continue to be paid.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.