Additionally, XLE’s payout ratio of just 32.1% indicates many of the ETF’s 46 holdings are not burdened by their payout and have room for future dividend growth. AltaVista’s P/E estimate for 2014 for the energy sector is 14.8 with a price-to-book ratio of 1.9. Those numbers are estimated to be 13.4 and 1.7 for 2015. [Value With Energy ETFs]
Still, the energy sector faces headwinds. Saudi Arabia, OPEC’s largest producer has not been rattled by lower oil prices and is not stemming production even as oil falls. However, those lower prices are crimping smaller exploration and production companies operating in U.S. shale formations where it is more expensive to extract oil.
Many of those smaller E&P firms are unable to generate free cash, leaving them vulnerable to not only declining oil prices but a potential rise in interest rates as well due to the large amount of high-yield commercial paper issued by these firms. About 15% of U.S. junk bonds hail from energy issuers. [Warnings for Junk Bond ETFs With Big Energy Exposure]
Saudi’s lower price targets are an attempt to push out U.S. shale oil producers, who require a higher oil price to maintain profitable margins. Recently, Citigroup argued that “full-cycle” costs, which include land, infrastructure, well drilling and operating costs, for new shale projects require oil prices of at least $70 to $80 per barrel.
Energy Select Sector SPDR
