The struggles of the energy sector this year have been well-documented. For example, the iShares U.S. Energy ETF (NYSEArca: IYE) is lower by 8%, but some market observers believe the sector’s recent stumble could give way to a buying opportunity.
Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
“Oil prices are hard to predict, as production cuts hinge on an uncertain political environment,” said BlackRock in a recent note. “We see oil trading mostly sideways over the next three months. OPEC members have shown discipline in cutting oil production, and U.S. inventory growth should soon stabilize as oil refiners increase purchases. Global demand is also likely to rise amid reflation.”
The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.
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. Global energy ETFs are struggling, too. Just look at the iShares Global Energy ETF (NYSEArca: IXC), which is also lower on a year-to-date basis.
Rivals to IYE include the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE), which are two of the least expensive energy sector ETFs.
“Energy stocks appear to reflect a more bearish price outlook. This creates opportunities,” according to BlackRock. “We like U.S. shale companies, amid cost cuts, improving technologies and the prospects of looser regulation. We also see value in the diversification offered by integrated-energy firms, including relatively cheap European oil majors. High yield energy bonds offer slightly better value after a recent selloff. We prefer credits of exploration companies due to attractive yields and balance sheet discipline.”
The $1.2 billion IYE holds 70 stocks, but allocates over 37% of its weight Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies.
For more information on the oil market, visit our oil category.