The Energy Select Sector SPDR (NYSEArca: XLE) slid more than 4% Monday, extending its one-month loss to over 10% and its year-to-date loss to nearly 22%, cementing its status as the worst performer among the nine sector SPDRs this year.
Bright spots have been few and far between for equity-based energy exchange traded funds this year and for all the struggles the encountered by the sector, it still is not inexpensive relative to the S&P 500. In fact, the energy patch is downright pricey compared to the broader market. This after a spate of spending cuts that have not been met with widespread enthusiasm among investors.
“The world’s oil companies have canceled or delayed final investment decisions on ~150 projects that could wipe out 19M bbl/day from the world’s hydrocarbons and stay underground for several years longer than expected amid lower crude oil prices, according to a new report from Tudor Pickering Holt,” reports Seeking Alpha.
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.
“Energy remains the most expensive due to falling net income margins – even though the XLE is down 15% in the past 12 months. Earnings in the sector have dropped along with energy prices,” reports Lawrence Lewithinn for Yahoo Finance.
“The biggest oil companies account for a third of the 150 projects Tudor Pickering says have been delayed or canceled, a scale that “suggests that companies will have real growth issues toward the end of the decade,” and some will have to buy smaller rivals to make up for it,” reports Seeking Alpha.
XLE is home to some of the largest U.S. energy companies, including Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).
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]
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]
“On the end of the spectrum, telecom is the cheapest, trading at just 12 times forward earnings. Second cheapest are the financials. That sector’s ETF (XLF) is at 14.2 times forward earnings,” according to Yahoo Finance.
Energy Select Sector SPDR
