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Energy ETFs in Focus on Big Oil Q2 Beat, Lower Production

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Big U.S. oil companies like Exxon Mobil (XOM - Free Report) , Chevron (CVX - Free Report) and ConocoPhillips (COP - Free Report) reported robust second-quarter results late last week.

All the three firms topped our revenue and earnings estimates on higher energy prices, but XOM and CVX are still struggling with shrinking production volumes amid the boom in shale oil and gas business. On the other hand, COP witnessed an increase in production (read: Guide to Oil Commodity ETFs).

Earnings for Big Oil Companies in Focus

The largest U.S. oil company, Exxon Mobil, reported earnings per share of $2.05 that strongly outpaced the Zacks Consensus Estimate of $1.91 and the year-ago earnings of $1.55. Total revenue rose 5% year over year to $111.6 billion, trumping the Zacks Consensus Estimate of $109.1 billion. However, production fell 5.7% to the equivalent of 3.84 million barrels a day, representing the lowest level in almost five years.

Global production at Chevron, which trails Exxon Mobil, slipped a modest 1.16% to the equivalent of 2.55 million barrels a day. Despite this, earnings per share came in at $2.98, outpacing the Zacks Consensus Estimate of $2.68 and improving from the year-ago earnings of $2.77. Revenues rose 1% year over year to $57.94 billion and were much above our estimate of $54.57.

Unlike the other two, production at ConocoPhillips – the third largest U.S. oil company – rose 6.5% year over year to the equivalent of 1.56 million barrels a day thanks to rising output in Texas and North Dakota. Increased production along with higher oil and natural gas prices led to strong results that beat our estimates on both top and bottom lines. Earnings per share of $1.61 were a penny ahead of the Zacks Consensus Estimate while revenues of $14,701 million were 2.1% higher than our estimate.

Market Impact

Continued declining production at Exxon Mobil dampened investors’ mood, setting a bearish tone for the broad energy sector. As a result, XOM, CVX and COP lost 4.3%, 3.5% and 4.6%, respectively, over the past two trading sessions. Additionally, the ongoing tension in Russia and more tough sanctions by the U.S. and European Union against the country could hinder global oil production further, sending the oil stocks down (read: Beyond Russia: How are Eastern Europe ETFs Performing?).

This trend is unlikely to continue given that the three stocks have a favorable Zacks Rank of #2 (Buy) or #3 (Hold) and fall in the solid industry with the Zacks Industry Rank in the top 13%. This suggests smooth trading in the coming months and that investors should not fully write-off these stocks from their portfolio. Instead, they should wait for the stocks to bottom out and then take advantage of the beaten down prices.

ETFs in Focus

In fact, investors could make a diversified play in the oil producing companies with the help of ETFs having large allocations to these big oil companies. This is especially true as these products are well spread across various segments and securities and could easily counter shocks from some of the industry’s biggest components.

Below, we have highlighted three funds that would be in focus in the coming days and could make great choices given their solid Zacks ETF Rank (see: all the energy ETFs here):

iShares U.S. Energy ETF ((IYE - Free Report) )

This ETF tracks the Dow Jones U.S. Oil & Gas Index, giving investors exposure to the broad energy space. The fund holds 86 stocks in its basket with AUM of over $2.3 billion and average daily volume of more than 941,000 shares. The product charges 43 bps in fees per year from investors.

Exxon Mobil and Chevron occupy the top two positions in the basket and take the bigger chunk of assets at 21.06% and 12.20%, respectively. ConocoPhillips on the other hand make up for the fourth position at 5.02%. From a sector perspective, oil & gas producers make up for nearly three-fourths share while oil equipment, services and distribution takes the remainder.

The fund lost 3.2% over the past two days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

Vanguard Energy ETF ((VDE - Free Report) )

This fund manages nearly $3.4 billion asset base and provides exposure to a basket of 161 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index. The product sees a good volume of more than 166,000 shares and charges 14 bps in annual fees.

Exxon and Chevron are the top two firms with 19.9% and 11.4% allocation, respectively, while COP is the fourth firm making up for 4.8% share. Though the product is skewed toward the integrated oil & gas sector with 36.30% of assets, exploration and production, and equipment services provide a nice mix in the portfolio with double-digit exposure (read: Energy Exploration ETFs: A Bright Spot in The Choppy Market).

VDE is down 3.2% in the past two days and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

Energy Select Sector SPDR ((XLE - Free Report) )

This is the largest and most popular ETF in the energy space with AUM of $11.5 billion and average daily volume of 9.9 million shares per day. It is also one of the low cost choices charging 16 bps in fees per year from investors. The fund follows the S&P Energy Select Sector Index and holds 47 securities in its basket.

Here again, XOM and CVX occupy the top two spots with 14.89% and 13.05% share, respectively, while COP takes the fourth position at 3.89%. In terms of industrial exposure, oil, gas & consumable fuels accounts for nearly 78% of the portfolio while energy equipment & services take the remainder.

The ETF is down nearly 3% in the same time frame and has a Zacks ETF Rank of 1 with a Medium risk outlook.

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