The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, has been the worst performer among the sector SPDR ETFs this year. XLE is down 15.6% year-to-date and has not closed above its 200-day moving average since early in the second quarter.
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.
Investors considering ETFs such as XLE and rival ETFs such as the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE) need to again monitor oil production data and credit issues at smaller energy producers.
Obviously, production is a key element in the decision-making process regarding energy investments. Currently, oil investors face conflicting reports regarding output. For example, Venezuela’s crude output is plunging to multi-year lows while Algeria is looking to boost production.
“The forward prospective P/E for this ETF is over 28X, price/book is nearly 2X, price/cash flow is over 11X, and the dividend yield is 3%; 5 of the 10 top holdings have P/E’s that are not meaningful because they are either extremely high due to minimal earnings, or infinite due to losses. In addition, refiners and marketers can lose money if crude prices spike faster than gasoline and other refined products rise (shrinking crack spreads),” according to a Seeking Alpha analysis of the energy sector.
Another energy ETF to consider is the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ). IEZ reflects a traditional market cap-weighted indexing methodology. If crude oil prices rebound, shale hydraulic fracturing companies could increase spending on exploration and production this year.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. 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.
For more information on the oil market, visit our oil category.