The energy sector’s status as the worst-performing sector in the S&P 500 this year has long since been cemented, leaving advisors and investors to ponder if the seventh-largest sector weight in the S&P 500 has better things in store for 2016.
Down about 19% this year, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, could use some relief. XLE has struggled this year as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies, have ranked as two of the worst–performing stocks in the Dow Jones Industrial Average.
Since those stocks combine for a third of XLE’s weight, the ETF and its rivals could use some help from either Exxon, Chevron or both to deliver improved returns in 2016. Some analysts think Chevron, the second-largest U.S. oil company, offers significant upside and that could prove to be good news for XLE.
California-based Chevron “is Cowen analyst Sam Margolin’s top pick for 2016, he told CNBC on Tuesday. The firm has a $122 target on shares of Chevron, a 34 percent premium to the current price at just above $91. The average price target on the stock is $99.32, according to FactSet,” reports CNBC.
With oil prices recently hitting 11-year lows, oil companies have been cutting back on expanding projects, which have hurt the explorers and producers space. Meanwhile, the depressed prices have weighed heavily on unconventional oil producers, like the nascent shale oil industry, which have much higher overhead costs that require higher prices to break even.
“Chevron announced earlier this month it would cut capital spending by 24 percent in 2016 to $26.6 billion. The company will not issue production forecasts until it reports earnings in January, but management previously said it expects output growth of 13 to 15 percent — about 2.9 million to 3 million barrels per day — by the end of 2017,” according to CNBC.
A growing minority of Wall Street strategists anticipate a pickup in oil prices next year and are recommending energy stocks as a way to play a rebound, reports Caroline Valetkevitch for Reuters.
In a recent Reuters poll, seven of 25 strategists cited energy as their contrarian pick for 2016 or expected a surprise upside in oil and energy next year, pointing to integrated oil companies as best situated to capitalize on the turn. [A Bottom Might be in for Energy ETFs]
Energy Select Sector SPDR
