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The energy sector is rebounding strongly on high oil prices and oil production growth. It is doing well this earnings season with earnings beat ratio of 80% and revenue beat ratio of 40%. In fact, energy is one of the leading sectors after construction and consumer discretionary.
Strong performance by top players such as Schlumberger (SLB), Baker Hughes (BHI) and Halliburton (HAL) is fueling the growth in the broad sector. Further, stronger-than expected results from Europe’s third largest oil company, BP plc (BP - Analyst Report), supports the bullish trend as we close out 2013 (read: Energy ETFs Surge on Q3 Oil Service Earnings Beats).
BP Earnings in Focus
The British oil giant reported earnings of $1.17 per share. Though earnings fell 26% year over year on declining refining margins, it easily beat the Zacks Consensus Estimate of 97 cents. Revenues rose 5% to $96.6 billion.
Driven by the solid earnings beat, the company announced a series of measures to encourage investors. BP hiked its annual dividend by 5.6% to 57 cents per share and plans to divest another $10 billion in assets by 2015. The proceeds will be used to reward shareholders in the form of buybacks.
While this speaks favorably of the company, the current macro trends might create some headwinds for the near future. Oil production at BP fell 2.3% from the year-ago quarter and may continue to shrink this fiscal year thanks to asset sales.
The market has welcomed BP’s earnings beat and its strategy to boost shareholders return through dividends and buybacks. The shares of BP jumped 5% at the close on Tuesday on elevated volumes. This marks the biggest one-day gain since January 2011 (read: 3 Top Performing Energy ETFs in Focus Now).
This news has spread optimism across the broad energy sector with stocks of other players in the space in green at the close on the day. These players include WPX Energy (WPX) – up 3.8%, Pioneer Natural Resources (PXD) – 3.3%, Valero Energy (VLO) – up 1.9%, Exxon Mobil (XOM) – up 0.8%, Chevron (CVX) – up 0.5% and ConocoPhillips (COP) – up 0.6%.
ETFs to Consider
Given BP’s strength to lift the whole energy sector and the solid run up in its share price, the following three ETFs could be worth a look for investors seeking to ride out the recent surge in the global energy sector. The trio has the largest allocation to the oil giant and looks to be in focus in the coming days with room for upside (see: all the Energy ETFs here).
SPDR S&P International Energy Sector ETF (IPW)
This fund provides exposure to the energy companies of developed markets excluding the U.S. by tracking the S&P Developed Ex-U.S. BMI Energy Sector Index. It is less popular and illiquid with $12.9 million in its asset base and around 4,000 shares in average daily volume. The ETF charges 50 bps in fees per year from investors.
In total, the fund holds about 104 securities in its basket. Of these firms, BP occupies the second position with 10.1% of total assets. About 90% of the portfolio is allocated to gas and consumable fuels, and the rest to equipment & services. The product is a large cap centric fund with a tilt toward value stocks.
In terms of country exposure, United Kingdom takes the largest share at 34.7% while Canada and France also gets double-digit exposure at 27.2% and 12.2%, respectively. The product added nearly 6.3% in the year-to-date time frame.
iShares MSCI ACWI ex U.S. Energy ETF (AXEN)
This ETF follows the MSCI All Country World ex USA Energy Index, giving investors exposure to the global energy space outside the U.S. The fund holds 102 stocks in its basket with AUM of $5.5 million while charging 48 bps in fees per year. Volume is little as it exchanges nearly 3,000 shares per day.
BP takes the top spot making up 8.24% of the assets while the gas and consumable fuels sector dominates with 93% share. Like IPW, this ETF also focuses on large caps with a nice mix of value, blend and growth securities (read: Is This the Top for Oil Service ETFs?).
The product is spread out across many nations, including United Kingdom (27.25%), Canada (19.90%), France (8.68%), Russia (7.85%) and China (6.82%). AXEN gained nearly 4% so far this year.
iShares MSCI Global Energy Producers ETF (FILL)
This fund manages a $5.1 million asset base and provides exposure to a large basket of 243 global energy producer stocks by tracking the MSCI ACWI Select Energy Producers Investable Market Index. The product has an expense ratio of 0.39% and sees a paltry volume of about 6,000 shares a day.
FILL is also a large cap centric fund with a slight tilt toward value stocks. Here, BP occupies the third position in the basket at 5.03%. North American firms dominate the fund’s returns with 48.83% of total assets, closely followed by United Kingdom (16.75%) and Canada (9.89%).
From a sector look, the product is skewed toward oil and gas integrated with 61% share and exploration and production with 32% share. The fund has returned over 12% so far this year.
BP’s earnings beat sent the stock higher on the day, thus becoming the cornerstone for other stocks in the space. A stronger economic outlook in the U.S. and a rebound in many international markets bode well for the energy stocks.
However, the sector currently seems to be under pressure from the sluggish trading in oil, trading below the triple-digit mark, and a huge supply of the commodity in the U.S. (read: Oil ETFs Slump on Bearish EIA Petroleum Report). Given this, investors could definitely take advantage of the slowdown in the space as well as solid earnings results from many oil companies.
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