The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up nearly 10% over the past three months, but that does not mean issues that plagued energy stocks and exchange traded funds last year have evaporated.
Nor is oil’s recent upside a guarantee of gains for energy equities. While USO up almost 10% over the past three months, the Energy Select Sector SPDR (NYSEArca: XLE) is lower by 1.6% over the same period. Energy stocks often prove less bad than oil futures when the latter decline, but the rub with that scenario is that oil’s rebound does not equal dollar-for-dollar gains in energy equities. Other factors are continue hampering energy ETFs. [Oil’s Rise Doesn’t Guarantee the Same for Energy Stocks]
In a recent research note, S&P Capital IQ points out that inventories of natural gas liquids (NGLs) remain elevated and that is a thorn in the side of oil and natural gas exploration and production companies.
“Given the ongoing growth in supply, our view that prices will remain under pressure for all key hydrocarbons (crude oil, wet gas, and dry gas), and the expectation that exports will save the day, we are not optimistic on any kind of near-term recovery in NGL pricing. The next question becomes: how influential is NGL pricing on E&P production?,” according to the research firm.
S&P Capital is less-than-enthusiastic on stocks with NGL exposure, including Cimarex Energy (NYSE: XEC), Devon Energy (NYSE: DVN) and Pioneer Natural Resources (NYSE: PXD). The research firm has tepid two-star ratings on all three of those names, which combine for 9.2% of the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEArca: IEO).
The $458.6 million IEO is down 2.3% over the past 90 days. IEO allocates about 28% of its combined weight to ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG) and Phillips 66 (NYSE: PSX). [Exploration and Production ETFs Stung by Glum Wall Street Views]
Regarding Cimarex, Devon and Pioneers, “all three of these stocks are priced at least 20% above their 5-year historical forward averages on either forward EBITDA or forward cash flows, and are at least flat or better than peers for stock performance year to date. XEC is up 11%, DVN is up 1%, and PXD is down 5%, versus a peer average that is down5%. We think current valuation premiums suggest that the market is embedding a return to rosier pricing, and we are less optimistic on this front. With stocks seemingly factoring in this kind of upward pricing traction, we advise investors to be cautious with these names,” according to S&P Capital IQ.
Mean reversion or simple departures from those names could hurt IEO and rival ETFs, such as the Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which includes North American hydraulic fracturing companies. FRAK allocates a combined 12.2% of its weight Devon, Pioneer and Cimarex.
S&P Capital IQ has underweight ratings on IEO and FRAK, though the latter has been relatively sturdy in recent weeks, losing just half a percent over the past 90 days.
Market Vectors Unconventional Oil & Gas ETF
