Old-Economy Energy Stocks Outperform Amid Low Oil Prices: A Case for Margin Resilience and Undervaluation

The energy sector, long dismissed as a relic of the carbon-intensive past, has quietly defied expectations in 2025. Amid persistently low oil prices—averaging $72/barrel year-to-date—legacy energy giants like ExxonMobil have demonstrated a resilience that starkly contrasts with the volatility of the S&P 500. This divergence, driven by disciplined cost management and strategic reinvention, suggests that old-economy energy stocks are being underappreciated in a deflationary environment.

Margin Resilience: The New Normal

ExxonMobil's second-quarter 2025 results offer a case study in operational discipline. Despite a 12% year-over-year decline in oil prices, the company reported earnings of $7.1 billion and free cash flow of $5.4 billion, with cash from operations hitting $11.5 billion . These figures underscore a critical shift: legacy energy firms are no longer at the mercy of commodity swings. Through capital efficiency improvements and production optimization, companies like Exxon have narrowed their breakeven costs, allowing them to generate robust cash flows even in sub-$80 oil environments.

Chevron, another industry stalwart, has mirrored this trend. While specific 2025 data remains scarce, its 2024 full-year EBITDA margin of 38%—well above the S&P 500 energy sector's average of 27%—highlights a structural advantage. Legacy players' ability to leverage scale, long-term supply contracts, and lower exploration risks gives them a margin buffer that tech-driven S&P 500 constituents lack.

Valuation Gaps and Strategic Reinvestment

The disconnect between performance and valuation is striking. As of Q2 2025, ExxonMobil trades at a forward P/E of 12.3x, compared to the S&P 500's 23.1x . This gap widens when considering EBITDA multiples: the energy sector's 10.8x versus the S&P's 18.4x. These metrics suggest the market is underestimating the durability of energy companies' cash flows.

Part of this undervaluation stems from outdated narratives framing energy stocks as “cyclical” rather than “defensive.” Yet Exxon's recent $9.2 billion shareholder return package in Q2 2025—including dividends and buybacks—demonstrates a commitment to rewarding investors that rivals the stability of blue-chip tech firms . Meanwhile, its foray into low-carbon ammonia and expansion in Guyana's Yellowtail project signal adaptability in a decarbonizing world, further insulating it from long-term obsolescence.

The S&P 500's Hidden Vulnerabilities

The S&P 500's outperformance in 2023–2024 masked a critical weakness: its exposure to interest rate sensitivity and earnings volatility. As oil prices dipped, energy stocks in the index underperformed, creating a false impression of sector-wide fragility. However, this masks the fact that legacy energy firms—unlike their shale or renewable counterparts—operate with lower leverage and higher cash conversion.

Consider the S&P 500's energy subsector, which includes smaller, high-debt exploration firms. These companies saw collective EBITDA margins contract to 22% in Q1 2025, versus Exxon's 41% . The valuation premium for the S&P 500 thus appears unjustified in a low-price regime, where balance sheet strength—not growth speculation—drives returns.

A Case for Rebalancing Portfolios

For investors, the lesson is clear: old-economy energy stocks offer a rare combination of margin resilience, attractive valuations, and strategic reinvention. While the S&P 500's growth allure remains tempting, its current multiple suggests an overconfidence in a prolonged AI and tech boom. Energy giants, meanwhile, are pricing in a more realistic macro outlook—one where energy demand remains inelastic and cash flow stability reigns supreme.

The market's underappreciation of these dynamics presents an opportunity. As ExxonMobil's CEO recently noted, “The energy transition isn't about abandoning hydrocarbons—it's about doing them better” . For now, “doing them better” is translating into outperformance.