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Energy stocks posted a record year. What's next for the group?

The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas.
Angus Mordant | Reuters

In a notable turnaround, the energy sector — after years of lackluster returns, accentuated by the pandemic — is set to finish 2021 as the S&P 500's top-performing group.

Energy's strength follows a recovery in oil and gas prices, but also marks a significant shift in companies' business models. Investors are now demanding healthier balance sheets, restrained spending and capital return in the form of dividends and buybacks.

The sector remains under-owned – due to concerns around environmental, social and governance factors and the energy transition – but Wall Street analysts say there's upside in 2022 for companies that remain disciplined after a transformational year for the industry.

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