The Energy Select Sector SPDR (NYSEArca: XLE) is the worst performer among the nine sector SPDR exchange traded funds this year and XLE’s rivals from other issuers have not performed much better. Some have been worse.
But the case for appealing valuations in the energy sector is decidedly split among market participants. 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.
“The point is that large-cap and mid-cap energy stock prices are influenced both by the oil price and by the performance of the broader stock market in general. Their prices were very low in February 2009 because the oil price and all stock prices were very low. Their prices held up relatively quite well from fall 2014 through spring 2015 because the whole stock market was holding up well then. Investors had confidence that the big oil companies would ride out the oil price drop and continue to prosper along with the entire economy when oil prices recovered,” according to a Seeking Alpha post.
Oil companies are now using spending cuts to prop up earnings. 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.