Key Takeaways
Oil prices are down so far in 2025, the result of oversupply and forecasts of lower demand from an economic slowdown.
Commodity 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 commodity cycles.
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 14% in 2025, as of May 22.1 The chief culprits include:
President Donald Trump’s unpredictable and severe tariff policies, which have led most economists to fear a recession and lower oil demand.
The OPEC+ oil cartel, which accounts for 40% of the world’s oil supply, has boosted its production quotas.
Falling oil prices present a conundrum for most energy companies. Declining commodity prices can eat into revenues, 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, the sector substantially underperformed broader measures of the small-cap market from 2009 to 2020.2
In recent years, however, we’ve noticed a change in how companies do business. Directors of energy companies, 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 generating free cash flow, which executives used to increase dividends and repurchase shares. Since then, small-cap energy stocks have improved their performance relative to the broader market.
What Makes Energy Companies Resilient?
Given the hard-to-predict external factors that can lead to price swings, companies that deal in commodities are exposed to volatility.
Our research has focused on identifying energy companies that we think are better insulated from these commodity price changes, thanks to their business structure and strategy. Examples of these firms include:
Crescent Energy: A Hedged Approach to Oil Volatility
Crescent Energy is a Houston-based oil and gas production company formed in 2021 through the merger of KKR-backed Independence Energy and Contango Oil & Gas. KKR, the private equity giant, holds a 10% ownership stake in Crescent Energy. This may explain why Crescent Energy prioritizes its role as a capital allocator over that of an oil operator.
Crescent Energy has implemented a relatively aggressive hedging strategy to manage risks associated with its balance sheet, providing a cushion of free cash flow cushion during economic or commodity downturns. In essence, Crescent has about 60% of its oil and natural gas production for 2025 hedged at a sizable market price premium using financial instruments like swaps and collars.
The company says this strategy helps maximize free cash flow and returns through the various stages of a commodity cycle.
“All of these facets of our strategy have enabled us to succeed through cycles, paying an average dividend yield of 6% since inception with a reinvestment rate below 50% and average leverage of 1.2 times,” said Crescent Energy CEO David Rockecharlie during a May 6 earnings call with analysts. “The current environment is nothing new, and our business is well-positioned.”3
Flowco: Optimizing Oil Production in 2025
Flowco is a Houston-based energy company that went public in January 2025. It specializes in production optimization, artificial lift and methane abatement solutions to help optimize oil and gas production.
The firm’s products are essential for optimizing its customers’ production processes. Since Flowco’s offerings are focused on production rather than exploration, the company is less vulnerable to swings in oil prices. Flowco has taken share from traditional vendors, and we believe it has the potential to increase both revenue and margins.
Hess Midstream: Stability in Energy Transport
Hess Midstream is a Houston-based company that transports oil. We prefer companies like this during periods of volatility because they aren’t directly affected by fluctuations in oil prices. The company generates revenue as long as oil flows through its pipelines.
The management team is committed to the attributes we seek in energy companies: dividend growth and maneuvers that enhance shareholder value, like share buybacks.
Navigating Energy Sector Volatility
Predicting commodity prices is a tricky business, particularly for oil. It won’t get any easier in the current environment, as the Trump tariffs remain challenging to navigate and could change at any moment.
The dynamics within OPEC+ are becoming increasingly difficult to predict. Saudi Arabia has historically aimed to keep oil prices above $90 a barrel to support its transition to a market economy less dependent on oil revenues. However, some member countries, like Kazakhstan, are prioritizing their individual goals over the cartel’s quotas, which is one reason more oil supply is entering the market.
Given this context, we will continue to focus on companies whose performance is less affected by market cycles and oil prices.