A Grim View on Energy ETFs

The tale of the tape for the energy sector is easily summed up. After a 9.5% third-quarter loss, was once the top-performing sector in the S&P 500 earlier this year has now turned into one of the worst groups.

Of the 25 worst-performing exchange traded funds over the past month, 12 are equity-based energy funds and does not include several ETFs tracking oil-rich Russia that are also on the list of the 25 worst offenders. So it is not surprising that some analysts have turned sour on energy stocks and ETFs.

Earlier this week, S&P Capital IQ said its “Investment Policy Committee downgraded the outlook for the S&P 500 Energy sector to marketweight from overweight” while noting increased capital spending its pressuring cash flow in the sector.

“Indeed, Capital IQ estimates suggest more negative free cash flows for exploration & production companies in 2015. As a result, we expect companies will announce spending cuts, which should weigh on estimated production, and weigh on valuations,” said S&P Capital IQ in a research note.

S&P Capital IQ may have a point. Several notable energy ETFs, including the Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) have been tumbling on fears that falling oil prices are making it less cost-effective for exploration and production to continue boosting production at various U.S. shale formations. [Fracking ETFs Take a Drubbing]

Analysts and investors are fearful that if West Texas Intermediate, the U.S. benchmark oil contract, falls below $80 per barrel shale producers’ profitability would be threatened and output would inevitably be pared. Both FCG and XOP hit new 52-week lows Thursday and did so on volume that was well above average. [Waiting on This Oil ETF to Rally]