Oil prices have rebounded in recent weeks, but not enough to convince major oil producers that more attractive pricing is a near-term reality and not enough to prevent additional from paring spending. In fact, some of the big energy companies that reside in exchange traded funds like the Energy Select Sector SPDR (NYSEArca: XLE) are relying on spending cuts to bolster profitability.
Investors need to identify the sector’s strongest names, which are likely also its biggest members. The larger integrated oil companies are more flush and have a larger war chest to draw upon when times get tough. While big oil has cut stock repurchase plans to save cash, many bigger players have not gone so far as to cut back on dividends. For instance, Exxon and Chevron have historically exhibited a long standing of steadily increasing dividends and remain so-called dividend aristocrats. [Oil ETF Dividends Appear Safe…Sort Of]
Valuations are also sitting at relatively attractive levels as well. Looking at the energy sector’s price-to-book ratio since 1990, the sector’s valuations are hovering near lows last seen during the financial downturn.
Some institutional investors are steering clear of energy stocks, but at least one exchange traded funds strategist is embracing beaten-up energy sector ETFs. However, that could portend opportunity with XLE.
According to a new report from Wood Mackenzie, roughly $1.5 trillion in global energy projects are not economically viable and risk being scrapped by oil producers.
“The consulting firm estimates that supply chain savings through squeezing the service sector will result in an average cost reduction of just 10%-15%, half what the industry is hoping to achieve, and the sector must rethink the way it approaches projects, many of which were already expensive when oil was at $100/bbl,” according to Seeking Alpha.
Lower oil prices are pressuring exploration and production stocks as the drillers’ value is based on production and assets already sunk into projects. [Energy ETF Investors Grow Wary of Oil Outlook]
Additionally, these energy companies require a lot of capital to keep drilling, and since depletion rates on wells are high, the companies will require cheap capital to keep operations running.
Energy Select Sector SPDR
