Long-term energy demand continues to support upstream oil companies. Investors can access the space through energy exploration and production related exchange traded funds that track large companies with healthy balance sheets.
“Our projections reflect our strong long-term outlook for energy demand and what we view as the growing importance of lower risk North American oil production growth,” M. Kay, S&P Capital IQ Equity Analyst, said in a research note. “S&P Capital IQ also has a positive fundamental outlook on the integrated oil and gas sub-industry, reflecting the strong upstream environment that we see, as well as what we view as low debt levels, strong cash positions, superior earnings, cash flow and dividend quality, and attractive valuations.”
Due to elevated crude oil prices, S&P analysts expect downstream, or refining and marketing, operations to underperform.
Moreover, S&P analysts larger integrated energy players have increased merger and acquisition activities as a way to acquire exploration and production operations. The analysts anticipate M&A activity to remain strong over the next year. [Exxon, Chevron Stock Declines Drive Energy ETF Outflows]
The U.S. Energy Information Administration calculates that global oil demand expanded 0.54 million barrels per day to 88.9 MMb/d in 2012. As of August 2013, global demand grew 1.09 MMb/d to 89.99. The EIA projects global demand to increase to 91.21 MMb/d in 2014. Meanwhile supply grew 0.64 MMb/d in 2013 and is expected to increase to 1.73 MMb/d in 2014.
S&P projects West Texas Intermediate crude oil prices will average $94.52 per barrel in 2013 and dip down to $89.57 in 2014.
Investors who want access to upstream companies with global exposure can take a look at the Energy Select Sector SPDR Fund (NYSEArca: XLE). The fund also includes exposure to oil and gas equipment and services, storage, transportation, refining and marketing companies. XLF has a 0.18% expense ratio. The iShares Dow Jones U.S. Energy Sector Index ETF (NYSEArca: IYE) holds about 26% of holdings are in exploration and production. IYF has a 0.46% expense ratio. [Oil ETFs Pare Weekly Gain as Syria Remains in Focus]
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.