Crude oil prices have more or less stabilized and energy stocks have strengthened, providing an opportunity in the oil industry and sector-related ETFs.
“I continue to maintain conviction in certain higher-quality, U.S.-based exploration and production companies,” John Dowd, Sector Portfolio Manager for Fidelity Investments. “These companies have adjusted their cost structures to reflect the lower commodity price environment and now have the ability to self-fund material production growth…. Looking out into 2018, I continue to believe those E&Ps that have embraced new, disruptive technology offer a compelling combination of risk and earnings growth potential.”
The U.S. energy sector have been able to easily access and raise capital, which has led to higher oil production capacity within the industry. Furthermore, improving technologies, notably hydraulic fracturing or fracking technologies, have allowed the U.S. energy sector pump out more oil and achieve profits even as crude prices dipped below their most recent cyclical peaks.
Furthermore, Dowd argued that the market has been valuing some U.S. exploration and production companies as if commodity prices will remain depressed in perpetuity and also as if they will not achieve production growth ahead.
“I see that as an opportunity. Overall, given these industry dynamics, I have been allocating capital to the U.S. E&P stocks with better cost positions, production growth, and return prospects than their foreign peers…. I remain optimistic that this group will outperform other areas within the sector over a longer time horizon.” Dowd added.
Investors interested in accessing the energy space have a number of options available. For instance, the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) provides broad exposure to the energy sector and oil producers, including 84.2% oil, gas & consumable fuels and 14.6% energy equipment & services companies, with top holdings like Exxon Mobil 22.1%, Chevron 14.4% and Schlumberger 6.3%.
Alternatively, investors can also focus on equipment and services names through targeted ETF plays, such as the VanEck Vectors Oil Service ETF (NYSEArca: OIH), iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ), PowerShares Dyanmic Oil & Gas Services Portfolio (NYSEArca: PXJ) and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES). These services ETFs include big names like Schlumberger and Halliburton that provide the necessary equipment to drill and maintain oil producing operations.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.