Oil exploration and production companies, which took the brunt of the hit during the crude selling, have benefited the most as prices rebounded, but ETF investors should begin to think about taking a more diversified approach to the energy sector.
Analysts at Wood Mackenzie Ltd. warned that explorers with a hand in multiple fronts like deepwater or onshore equipment are trading at a premium to pure-play oil drillers, reports Alex Nussbaum for Bloomberg.
After a mid-decade crash in shale fields and stabilizing international oil prices, the “diversified independents” like ConocoPhillips (NYSE: COP) and Occidental Petroleum Corp. (NYSE: OXY) are back in favor, the analysts said.
“Both the diversified independents and the majors have overtaken the focused U.S. players for the first time,” WoodMac analysts said in a note. “The oil price collapse has underlined the benefits of having portfolio exposure to cash-generative legacy assets, flexible unconventional opportunities and high-margin international growth.”
How to Diversify Energy Plays
ETF investors can diversify their energy play with more integrated oil players through broad sector plays, such as the Energy Select Sector SPDR (NYSEArca: XLE), Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
These broad energy ETF plays include a more diversified portfolio to gain exposure to oil producers. For instance, IYE includes 40.0% integrated oil gas, 28.8% oil gas exploration and production, 12.1% oil gas equipment and services, 10.0% oil gas refining and marketing, 6.8% oil gas storage and transportation, and 1.5% oil and gas drilling.
Diversified independents like COP makes up 4.6% of XLE’s portfolio, 5.1% of IYE, 4.7% of VDE, and 4.9% of FENY. OXY makes up 4.4% of XLE, 3.9% of IYE, 3.7% of VDE and 3.7% of FENY.
For more information on the oil market, visit our energy category.