The energy sector, especially the oil & gas producing stocks, has been performing remarkably well this year. The sector has benefitted from relentless geopolitical tensions from Russia to Iraq ─ both rich in oil ─ that stoked the possibility of supply disruptions and a continued focus on U.S. oil output.
Favorable Production Trend
Oil production in the U.S., the largest oil consumer, hit highs not seen in decades. According to the Energy Information Administration (EIA), U.S. crude oil production was around 8.5 million barrels per day (bbl/d) in July, representing the highest monthly output since April 1987.
Also, the total U.S. crude oil production is expected to be around 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015 (per EIA), up from 7.5 million bbl/d in 2013, as per EIA. In fact, 2015 could be the biggest crude oil output year for the U.S. after 1972.
Natural gas plant liquids’ output is also expected to expand from an average 2.6 million bbl/d in 2013 to 3.1 million bbl/d in 2015, according to EIA. In a nutshell, the U.S. might become energy independent by 2035 and a net exporter of natural gas by the end of this decade.
The self sufficiency in domestic production can also be validated by declining imports. The import of total U.S. petroleum and other liquids consumption declined from 60% in 2005 to about of 33% in 2013. EIA now projects that the proportion of net imports will decrease to 22% in 2015.
Though the recent truce talks between Russia and Ukraine spurred the possibility of an end to prolonged geopolitical issues and the investing world greeted the step with cheers, the sustainability of the cease fire is yet to be seen. So other oil producing regions should be busy shoring up their reserves.
The tension in Iraq is unlikely to cool down soon though the likelihood of reduced oil supplies is less. In short, all the global issues hint at increased levels of energy production, at least for the short term.
How to Bet?
The U.S. oil/energy sector is expected to see robust earnings growth this year (9%) and in the next (7.6%), as per the Zacks Earnings Trends. Given the optimism on the production front and a promising growth outlook, investors might seek to ride out this space in ETF form.
For those investors, we have highlighted three energy ETFs having favorable Zacks ETF Ranks. These ETFs performed pretty well over the past month, and investors may enjoy smooth trading in the months ahead, should global issues and U.S. shale oil boom remain in place (see: all the energy ETFs here).
Notably, Russia, Saudi Arabia and U.S. are the three major oil producing nations in the world. With Russia still confusing investors with its geopolitical stand, we would like to stick to three popular U.S. energy ETFs as Saudi is yet to get a pure-play ETF (read: Global X Files for Saudi Arabia ETF).
PowerShares DWA Energy Momentum Portfolio (PXI)
This fund provides exposure to 39 multi-cap energy stocks having positive relative strength (momentum) characteristics by tracking the DWA Energy Technical Leaders Index. It has accumulated about $280 million in its asset base and trades at a paltry volume of about 30,000 shares per day. Expense ratio came in at 0.66%.
The ETF is somewhat concentrated on the top 10 holdings at over 40% with the largest allocation going to Cheniere Energy (LNG), Concho Resources Inc. (CXO) and Continental Resources (CLR). From a sector look, three-fourths of the portfolio is tilted toward oil, gas & consumable fuels while energy, equipment and services make up for the remainder.
PXI is up 15.8% in the year-to-date time frame. The fund has advanced about 5.9% in the past one month. PXI has a Zacks ETF Rank #1 or ‘Strong Buy’ rating with a ‘High’ risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
XOP seems to be a solid choice in the energy space to play this surging trend. The fund follows the S&P Oil & Gas Exploration & Production Select Industry Index, holding 88 stocks in its portfolio. The product provides equal weight exposure across a number of firms as each holds less than 1.78% of total assets.
It has amassed nearly $1.26 billion in its asset base and trades in heavy volume of about 4.5 million shares per day. The ETF charges 35 bps in annual fees from investors and has surged 13.6% so far this year and more than 5% in the last one month. XOP has a Zacks ETF Rank #1 with a ‘High’ risk outlook (read: 2 Hot Summer ETFs Surging to #1 Ranks).
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
This ETF tracks the Dow Jones U.S. Select Oil Exploration & Production Index and holds 76 securities in total. The product has been able to manage assets worth $633 million and trades in good volume of 100,000 shares per day.
Here too, company-specific risk is high as indicated by a concentration level of about 60% of assets in the top 10 holdings. In fact, the top firm ─ ConocoPhillips (COP - Free Report) ─ dominates the fund return with a 13.2% share, followed by EOG Resources (EOG) and Anadarko Petroleum (APC) at 7.9% and 7.56%, respectively (read: Anadarko's Upbeat Guidance Puts These Energy ETFs in Focus).
The fund gained over 3% in the past one month and delivered strong returns of 15.3% in the year-to-date period. IEO too has a Zacks ETF Rank #1 with a ‘High’ risk outlook.
While the output scenario is shaping up in the U.S. and the domestic-focused ETFs are worth a look, investors can consider some global editions as well. MSCI Emerging Markets Energy Sector Capped Index Fund (EMEY) is one such fund.
The fund added over 5% in the last one month. EMEY has 23% exposure in Russia and 22% in China, which is also fast filling up oil reserves. Thus, if the truce works in Russia and China delivers some better economic data or comes up with a stimulus measure due to its subdued economy, EMEY might get a boost. EMEY has a Zacks ETF Rank #3 (Hold) with a High Risk outlook.
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