Although the energy sector is not this year’s worst-performing group, energy equities and the relevant exchange traded funds still face ample headwinds. That is the case even with modest sturdiness from integrated oil names and refiners.
Large integrated oil companies are expected to hold up better than drilling stocks as these giants have both upstream exploration and production, along with downstream refining operations. Down 4.1% over the past month, the iShares Global Energy ETF (NYSEArca: IXC) is one equity-based energy ETF that is far from being out of the woods.
The low oil environment may persist as the Organization of Petroleum Exporting Countries projects demand for its crude to remain lower in 2020 than in 2016 as rivals remain resilient despite the depressed prices.
Last month “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.
“Royal Dutch Shell Plc had its debt rating cut to the lowest since Standard & Poor’s began coverage in 1990, and downgrades of several other major European oil and gas companies will probably follow in coming weeks,” reports Bloomberg.
Although the $884 million IXC is a global ETF with over 59% of its weight devoted to U.S. stocks, European oil majors account for a significant percentage of the ETF’s weight. For example, the U.K., France and Italy combine for nearly 23% of the ETF’s weight.
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]
“Oil producers lost more than $1.7 trillion in market value since crude prices began to slide. The specter of shrinking cash flow prompted more than 240,000 job cuts as drillers canceled rig contracts, slashed dividends and walked away from their riskiest, most ambitious projects,” according to Bloomberg.
iShares Global Energy ETF
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.