Energy-sector exchange traded funds could come out of the up-ended oil market stronger as large oil companies shop around for faltering smaller rivals.
Energy has been the worst performing sector so far this year. Year-to-date, the Energy Select Sector SPDR (NYSEArca: XLE) fell 9.9%, Vanguard Energy ETF (NYSEArca: VDE) decreased 11.1% and iShares U.S. Energy ETF (NYSEArca: IYE) dropped 10.8%. [Looking for Strength Among Energy ETFs]
After prices on crude oil nearly halving over the past six months to a five-year low, energy companies are adjusting their assets and taking a harder look at their balance sheets, reports Ron Bousso for Reuters.
However, many larger companies are still flush with cash and could move in on smaller oil producers and explorers that are struggling with West Texas Intermediate crude oil at $56.7 per barrel and Brent crude at $61.3 per barrel.
For instance, Repsol SA launched the largest Canadian energy takeover Monday, acquiring Talisman Energy (NYSE: TLM). BP and Royal Dutch Shell have also hinted that the low oil price reveal buying opportunities.
Analysts now expect this is just the start of more merger and acquisition activity to come. Historically, M&A activity increased after oil prices strengthened following a sharp drop, such as 2008 through 2009, according to BMO Capital Markets.
“We believe the current environment will precipitate a wave of M&A activity in the European E&P (exploration and production) sector once the oil price stabilizes and begins to firm,” BMO Capital Markets said.
BMO’s Brendan Warn argues that major national and international oil companies with strong cash flows could expand their own production by simply acquiring smaller explorers and services companies.
For international exposure, the iShares Global Energy ETF (NYSEArca: IXC) tracks global energy producers and distributors, and the iShares MSCI Global Energy Producers ETF (NYSEArca: FILL) includes global energy explorers and producers. Both IXC and FILL include a heavy 50% tilt toward the U.S. Alternatively, the SPDR S&P International Energy Sector ETF (NYSEArca: IPW) tracks non-U.S. energy companies. [Old Takeover Rumor Could Lift Some Overlooked ETFs]
Energy Select Sector SPDR
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.