The energy sector, the seventh-largest sector weight in the S&P 500, has been the worst-performing sector in the U.S. this year, but that could be set to change as some of the group’s biggest names give investors reasons to cheer with improving profits.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy stocks, rose slightly last week following upbeat first-quarter profit reports from Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). Dow components Exxon and Chevron are the two largest U.S. oil companies and are major components in XLE and rival ETFs such as the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE).
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.
“Already, analysts are forecasting profit blowouts even larger than those registered when Exxon and Chevron disclosed first-quarter results on Friday. Exxon is seen lifting per-share earnings by 132 percent while Chevron is expected to post its biggest second-quarter profit in three years,” reports Joe Carroll for Bloomberg.
Energy’s earnings drag is evaporating as S&P 500 energy earnings are expected to be only slightly negative for the fourth quarter and offer significant upside potential moving forward in 2017. XLE currently resides near its lowest levels since prior to the U.S. presidential election in November. Exxon and Chevron combine for over 38% of XLE’s weight.
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.
“Exxon, the world’s biggest oil producer by market value, earned 95 cents a share during the first quarter, outperforming all but one of the 19 analysts’ estimates in a Bloomberg survey. Chevron, the second-largest U.S. driller, swung to a profit in a big way, scoring its largest quarterly gain since 2014 and a per-share result that was 64 percent higher than the average estimate,” according to Bloomberg.
Last Friday, Chevron reported a first-quarter profit after reporting an annual loss last year. Exxon also revealed a dividend increase last week. The company has one of the longest dividend increase streaks among major energy firms.
For more information on the oil market, visit our oil category.