An Energy ETF That Needs Oil to Rally

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.