Oil prices and energy stocks are rebounding this year, but big-name energy stocks and exchange traded funds (ETFs), such as the Energy Select Sector SPDR (NYSEArca: XLE) remain well below their 2014 highs.
However, XLE and rival energy ETFs, such as the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY), are cap-weighted funds. That means these ETFs allocate significant portions to the largest oil companies, including Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) along with Schlumberger (NYSE: SLB), the largest oilfield services provider.
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What makes that trait important is companies like Exxon and Chevron have taken steps to conserve cash as oil prices remain well off recent highs. That could mean some energy industry consolidation is on the way. As some industry observers, it is usually during times of tumult for the sector that oil majors are born and get bigger.
“It is in our current market that giants like Exxon, BP, Chevron, ConocoPhillips, and Shell are formed,” reports OilPrice.com. “Another large oil and gas producer finds itself on the cusp of joining the ranks of oil and gas super-majors: Occidental Petroleum (NYSE: OXY). Occidental Petroleum is a U.S.-based oil and gas company producing over 650,000 barrels of oil equivalent per day (boe/d). The company is unique; it has a dominant domestic position in the Permian Basin and holds other large producing assets in the Middle East and Latin America.”
[related_stories]Occidental is a top 10 holding in each of the aforementioned ETFs. There was a time when Occidental was mentioned as a possible takeover target, but that was long ago and with a market value of $58 billion, the list of legitimate acquirers is limited. Plus, with just $3 billion in debt, Occidental has a balance sheet that could make it a buyer of a smaller company found in ETFs like XLE or VDE.
Oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects. 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.
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Various factors present “Occidental with one option – to dramatically increase its production and maintain the asset base and cash flows they desire to acquire. Based on the global companies and companies who have significant exposure to the Permian Basin, Apache Corporation (NYSE: APA) stands out as the primary acquisition target. Of the Permian Basin players, Apache has a sizable reserve base when compared to its peers,” according to OilPrice.com.
Apache is also a holding in each of the aforementioned ETFs.
For more information on the Energy ETF market, visit our Energy category.
Energy Select Sector SPDR
