Value investors are taking a second look at energy sector exchange traded funds after a steep sell-off in oil-related stocks on falling prices.
Over the past three months, the Energy Select Sector SPDR (NYSEArca: XLE) has declined 11.6%, iShares U.S. Energy ETF (NYSEArca: IYE) decreased 11.4% and Vanguard Energy ETF (NYSEArca: VDE) fell 11.6%.
Currently, XLE is trading at a 14.7 price-to-earnings ratio and a 1.9 price-to-book, IYE is shows a 14.4 P/E and a 1.9 P/B, and VDE has a 15.7 P/E and a 2.0 P/B. In contrast, the S&P 500 index is hovering around a 17.1 P/E and a 2.4 P/B. [Value in Energy ETFs]
“I think the integrated oil stocks are selling for the lowest valuations they’ve sold for in my lifetime, and that’s pretty long,” Rich Pzena, founder and co-CIO at Pzena Investment Management, said on CNBC. “The reasons are pretty straightforward. The big oil companies have spent a lot of money over the last five or six years, and very little to show for it. Oil prices are weakening. The strong demand story we had seven, eight years ago is gone, and so they’ve gotten very, very cheap.”
For instance, Pzena points to cheap valuations in Exxon Mobil (NYSE: XOM), which has a 12.0 P/E and a 2.2 P/B.
The broad energy sector ETFs include heavy positions in integrated oil stocks, like Exxon and Chevron (NYSE: CVX). Specifically, XLE includes a 15.7% position in XOM and 13.2% in CVX, IYE includes XOM 21.5% and CVX 12.0%, and VDE has XOM 19.9% and CVX 11.5%.
The energy sector has stumbled over the past few months on declining crude oil prices. West Texas Intermediate crude oil is currently trading at $88.7 per barrel while the Brent crude oil is hovering around $91.9 per barrel. [Taking A Bearish Approach to Oil ETFs]
The U.S. Energy Information Administration has reduced its 2014 and 2014 crude price outlook due to rising output, notably in the U.S., and diminished demand due to a slowdown in China and the Eurozone. The EIA now expects WTI oil to average $94.58 per barrel in 2015, compared to September calls for an average $94.67 per barrel, Bloomberg reports.
Energy Select Sector SPDR
For more information on the oil industry, visit our oil category.
Max Chen contributed to this article.