Oil Exploration ETFs: A Bargain Hunter’s Dream?

October 12th at 12:00pm by Tom Lydon

As the stock market inches higher, bargain hunting gets a little bit harder. But offshore drillers, along with related exchange traded funds (ETFs),  are trading at bargain price-to-earnings ratios after investors dumped shares in what appeared to be guilt by association to the BP-Gulf oil fiasco.

Offshore drilling companies that lease oil rigs to energy companies are trading as low as 7-1011 times estimated 2007 earnings and 6-to-7 times 2008 returns, reports Andrew Bary for Barron’s. Wall Street has kept oil driller valuations low because of concerns associated with an increase in new rig operations set to come out. [Oil Services ETFs: Undervalued?]

However, oil bulls believe that the current boom in the oil industry may continue into the next decade as high oil and gas prices create greater demand for offshore production. Transocean (NYSE: RIG) CEO Bob Long recently stated that they are “comfortable that…oil prices down to $40 a barrel and maybe even down to $35 would have little or no impact on the deepwater market.” [Oil and Gas ETFs Feeling the Push-Pull.]

More recently, some drilling companies have been repurchasing shares in an attempt to increase the value of their stocks. But the buybacks haven’t made much of a difference for most stocks that have continued to slip in the last year. Other drillers have implemented more favorable dividend payouts, but that too has not helped valuations much.

Still, other companies, like Rosetta Resources (NASDAQ: ROSE), are also expanding their oil and gas exploratory development on land, writes David Fessler for InvestmentU. Rosetta was able to decrease the number of its operations during lean times to save money to reinvest in promising areas that are now cheap. Additionally, the company has maintained its “legacy wells” that continue to generate a steady stream of revenue.

For more information on the oil industry, visit our oil & gas exploration category. There are five ways to get exposure to the oil exploration industry, according to the ETF Analyzer. Visit the Analyzer to see all 17 ways to play the oil industry. All of these ETFs are currently above their 200-day moving average, meaning there may be an opportunity here. Read more about how you can use trend following in our special report.

  • iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSEArca: IEO)
  • iShares Dow Jones U.S. Oil Equipment & Services Index Fund (NYAR: IEZ)
  • PowerShares Dynamic Oil Services (NYSEArca: PXJ)
  • SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP)
  • SPDR S&P Oil & Gas Equipment & Services (NYSEArca: XES)

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.