With oil prices sliding, it is not surprising that the energy sector and its related exchange traded funds are struggling. However, some parts of the energy sector take oil’s struggles particularly hard. That includes exploration and production stocks and ETFs.
For example, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) is lower by more than 13% year-to-date. Other ETFs with exploration and production exposure include the PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEArca: PXE) and the Guggenheim S&P Equal Weight Energy ETF (NYSEArca: RYE).
Given the historical sensitivity of exploration and production names to oil prices, it would stand to reason that lower oil output would benefit the industry. While the Organization of Petroleum Exporting Countries (OPEC) has moved to trim output, U.S. shale producers are boosting production as highlighted by the rising rig count in the U.S.
“Compared to the years 2007-2015 where the highest aggregate Price/Cash Flow for XOP was ~11, 2016 and later has seen an abnormal elevation of the Price/Cash Flow up to ~16, making XOP overvalued on a relative basis. It seems as though Mr. Market has gotten ahead of itself!,” according to a Seeking Alpha analysis of XOP.
Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
“Based on the Brent-WTI spread, the Commitment of Traders Report and the expected direction of interest rates, it is concluded that the price of oil is headed lower, meaning that the price of XOP should also go lower as well. The aggregate fundamentals of XOP are currently valuing oil exploration and development companies abnormally high,” according to Seeking Alpha.
The Direxion Daily S&P Oil & Gas Exploration & Production Bear Shares (NYSEArca: DRIP) takes the -3x, or -300%, daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index, the same index tracked by XOP.
For more information on Energy ETFs, visit our Energy category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.