The energy sector was the worst-performing group in the S&P 500 last year making the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, the worst performer among the nine sector SPDR ETFs.
A big part of the reason behind the woes XLE and other big-name energy ETFs was the specter of massive spending cuts by major energy producers. 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.
Analysts expect that trend to continue in 2016. 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. [Oil ETF Dividends Appear Safe…Sort Of]
“Moody’s foresees capital spending reductions of at least 20%-25% in 2016 across the oil and gas E&P business, with oilfield services and drilling remaining the most stressed energy segment,” according to a Seeking Alpha brief. “Moody’s recently projected a ‘lower for much longer’ energy scenario, with average prices of WTI crude at $40/bbl in 2016 – $8 lower than its earlier forecast – $45/bbl in 2017 and $50 in 2018.”