The Energy Select Sector SPDR ETF (NYSEArca: XLE) is the worst performer among the nine established sector SPDR exchange traded funds this year, but that is not stopping some market observers from calling for upside for energy stocks and ETFs.

XLE’s October resurgence came as investors digested what was a batch of predictably dire earnings reports from the energy sector. Heading into the start of third-quarter earnings season, some market observers predicted energy sector earnings would contract as much as 60%, the worst contraction of any S&P 500 sector.

Ongoing struggles for XLE and rival energy ETFs are prompting some market observers to wave the white flag when it comes to forecasting what’s next in the energy patch.

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.

Profit expectations have fallen dramatically which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined, though P/Es have come off their highs and estimates appear to have stabilized,” according to AltaVista. [Oil ETF Dividends Appear Safe…Sort Of]

“Credit Suisse analyst Jan Stuart said on Friday that U.S. crude-oil production “is simply, really falling.” This is, of course, just what Saudi Arabia is trying to accomplish through its refusal to cut production after oil prices more than halved. Rather than to follow its traditional course of propping up the price of oil, the kingdom, along with its OPEC partners, is trying to squelch the U.S. shale-production industry that transformed the international oil market. The strategy is working because shale production is much more expensive pumping from traditional wells. For one thing, shale production requires the continual development of new sources and the building of new rigs,” reports Phillip Van Doorn for MarketWatch.

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]

Energy Select Sector SPDR