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.
Additionally, some energy observers remain optimistic, pointing to renewed promises from oil companies that they won’t cut dividend payouts.
“The only features they have to attract investors is predictable growing dividend distribution,” Oppenheimer & Co analyst Fadel Gheit, told the WSJ, adding that if dividends aren’t maintained, then “the knife will come down very sharply.”
Oil majors have been raising dividends this year, despite earnings declines. For example, in the first nine months of the year, Royal Dutch Shell, Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX) and BP have handed out almost $28 billion to shareholders, or about a 10% increase from the 2014 period, reports Sarah Kent for MarketWatch.
XOM makes up 16.9% of XLE , 23.4% of IYE and 15.7% of IXC. CVX accounts for 13.1% of XLE, 11.9% of IYE and 8.0% of IXC.
The energy sector is generating some pretty attractive yields. XLE shows a 2.92% 12-month yield, IYE has a 2.88% 12-month yield and IXC has a 3.31% 12-month yield.
iShares Global Energy ETF
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.