Can Energy Sector ETFs Diverge From Crude?

Oil prices are down in a rut, but oil producers and sector-related exchange traded funds are starting to pull ahead of crude oil as energy companies grow more efficient and maintain attractive dividend yields.

Since October, Brent crude oil has declined 8%, whereas oil and gas stocks are up almost 8%, as reflected by the S&P Global Oil Index, reports Christopher Whittall for the Wall Street Journal.

The iShares Global Energy ETF (NYSEArca: IXC), which tries to reflect the performance of the S&P Global 1200 Energy Sector Index, has gained 8.9% since the start of October. Meanwhile, the U.S. energy sector has also seen strong gains, with the iShares U.S. Energy ETF (NYSEArca: IYE) and Energy Select Sector SPDR ETF (NYSEArca: XLE) both up about 11.2% since October. [Why Energy ETFs Have Upside Potential]

Fueling the renewed strength in the energy sector, integrated oil companies have adjusted to the low oil environment by reducing costs, divesting businesses and squeezing suppliers for better deals.

For instance, BP Plc (NYSE: BP) plans to sell $3 billion to $5 billion in assets next year and divest a further $2 billion to $3 billion of assets in 2017.

This isn’t the first time the energy sector has been forced to tighten their belts. Through 1987 to 1997, companies suffered through an extended period of lower prices and responded by cutting costs, which ensured “earnings grew strongly,” according to Bernstein research.

Consequently, some money managers are betting that these belt-tightening measures may lead to profitability later on.

“There’s the potential for these companies to turn themselves into cash machines,” James Sym, a portfolio manager at Schroders, told the WSJ. Sym has been buying shares in oil stocks like Italian energy giant ENI SpA and France’s Total SA in recent months.

Matthew Tillet, a portfolio manager at Allianz Global Investors, has been adding positions in BP and Royal Dutch Shell.

IXC has a 4.7% position in BP, 1.9% in ENI, 5.4% in Total SA and 4.3% in Royal Dutch Shell.