After giving an impressive performance last year, global energy stocks have been underperforming the broad market on falling oil prices, rising global supply, and waning global demand. Notably, energy has been the worst performing sector in the MSCI World Index in the first month of the year.
Oil production in the U.S, the largest oil consumer, saw an increase in production of 992,000 barrels a day in 2013. In fact, the U.S. is expected to overtake Russia as the world’s biggest producer of oil within two years and become energy independent in the next two decades (read: Play the U.S. Oil Boom with These Energy ETFs).
Despite the booming shale oil and gas business, U.S. oil giants are seeing shrinking production volumes while operating costs are rising. As such, energy has been the biggest laggard this earnings season with 9.3% decline in earnings and 3.7% decline in revenues so far.
This is particularly true given the disappointing fourth quarter earnings from the U.S. oil giants – Chevron (CVX - Analyst Report) and Exxon Mobil (XOM - Analyst Report).
Earnings for Big Oil Companies in Focus
Last week, the largest U.S. oil company, XOM, reported earnings of $1.91 per share for the fourth quarter. Earnings were a penny ahead of the Zacks Consensus Estimate, but fell 13.2% from the year-ago quarter. Total revenue dropped 3.3% year over year to $110.9 billion, missing the Zacks Consensus Estimate of $114.9 billion.
The lackluster result was primarily due to lower oil and gas output that dropped for the ninth time in the past 10 quarters as well as rising cost for building new reserves (read: 3 Energy ETFs with a Choppy Start to 2014).
Chevron, which trails XOM, was hit by higher costs, lower production and lower margins at refineries in the fourth quarter. Earnings per share came in at $2.57, falling short of the Zacks Consensus Estimate by a penny, and 30.5% below the year-ago earnings. Revenues fell 7% to $56.16 billion and were far from the Zacks Consensus Estimate of $76.43 billion.
The sluggish performance from these two giants has definitely impacted their share prices. Exxon Mobil lost more than 3% over the past two trading sessions following the earnings announcement on January 30. On the other hand, CVX lost over 4% on the day of its earnings announcement (January 31).
This suggests rough trading in the next few days and coupled with unfavorable macro fundamentals, investors must take great caution while trading in these big oil companies. Further, both XOM and CVX fall in the industry having a poor Zacks Industry Rank in the bottom 32%.
Moreover, both the stocks retain a Zacks Rank #3 (Hold), indicating that the short-term outlook does not look so bad and they are expected to perform with the broader markets (read: 3 Top Ranked ETFs That Will Crush the Market in 2014).
The plunge also impacted the ETF world, as most of the funds that have larger allocations to these oil companies are trending down over the past five days. Below, we have highlighted three ETFs that could be in focus in the coming days as well.
Investors should closely monitor the movement in these funds and grab any opportunity from a surge in the price, or avoid them if the oil giants look to have more weakness in the weeks ahead (see: all the energy ETFs here):
iShares U.S. Energy ETF (IYE - ETF report)
This ETF tracks the Dow Jones U.S. Oil & Gas Index, giving investors exposure to the broad energy space. The fund holds 84 stocks in its basket with AUM of about $1.6 billion and average daily volume of more than 466,000 shares. The product charges 45 bps in fees per year from investors.
Exxon Mobil and Chevron occupy the top two positions in the basket and take big chunks of the assets at 23.08% and 12.59%, respectively. From a sector perspective, oil & gas producers make up for three-fourths share while oil equipment, services and distribution takes the remainder. The fund lost 1.44% over the past five days and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a ‘Low’ risk outlook.
Fidelity MSCI Energy Index ETF (FENY - ETF report)
This is the newest addition in the energy space having accumulated $30.6 million in its asset base since its debut three months ago. The fund follows the MSCI USA IMI Energy Index, holding 160 stocks in its basket. Out of these, XOM and CVX take the top two spots at 22.40% and 11.91%, respectively.
In terms of industrial exposure, oil, gas & consumable fuels accounts for nearly 80% of the portfolio while energy equipment & services take the remainder. The product is the low cost choice in the energy space, charging just 12 bps in annual fees. Volume is light, trading 38,000 shares a day. The ETF is down 1.5% over the last five trading sessions (read: Inside Fidelity's New Low Cost Sector ETF Lineup).
Vanguard Energy ETF (VDE - ETF report)
This fund manages a $2.5 billion asset base and provides exposure to a basket of 162 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index. The product sees good volume of more than 112,000 shares and charges 14 bps in annual fees.
Again here, XOM and CVX are the top two firms with 23% and 12.5% allocation, respectively. Though the product is skewed toward the integrated oil & gas sector with 40.8% of assets, exploration and production, and equipment services provide a nice mix in the portfolio. VDE lost 1.3% in the past five days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook.
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