Energy ETF Impact On Dismal Oil Company Earnings

oil gasAfter a massive setback in 2012, the U.S. energy sector has rebounded strongly on the recent surge in oil production and rising oil prices. Oil production in the U.S, the world’s largest oil consumer, soared to levels not seen in decades.

In fact, the U.S. is expected to surpass both Russia and Saudi Arabia and become the world’s biggest producer of oil over the next five years. Further, the U.S. could become energy self-sufficient by 2035 and a net exporter of natural gas by the end of the decade (read: 3 Energy ETFs for America’s Production Boom).

Despite the U.S. oil boom, oil giants are seeing shrinking production volumes while operating costs are rising. As such, energy has been the biggest laggard this earnings season with 9.4% decline in earnings. This is particularly true given the disappointing second quarter earnings from the two largest companies that just reported; Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM).

Energy Earnings in Focus

Last week, the largest U.S. oil company, XOM, posted their smallest profit in more than three years on lower oil and gas output and weaker earnings from its refining business.

Earnings declined 19% year over year to $1.55 per share, missing the Zacks Consensus Estimate of $1.89. Total revenue decreased 16.4% year over year to $106.5 billion, but beat the Zacks Consensus Estimate of $101.8 billion.

Meanwhile, Chevron reported lackluster second quarter profits in four years due to softer market conditions for crude oil and refined products as well as increased repair and maintenance work on U.S. refineries.

Earnings per share came in at $2.77, missing the Zacks Consensus Estimate of $2.96 and the year-ago quarter of $3.66. Revenues fell 8.4% to $57.37 billion but managed to beat the Zacks Consensus Estimate by 1.5%.

Market Impact

The lower-than-expected earnings from these two giants have definitely impacted their share prices.  Exxon Mobil lost more than 2.5% in the single session on the day of its earnings release (Aug 1) and is now down at around 3% over the past five days.

On the other hand, CVX lost nearly 2.5% on the day of its earnings announcement (Aug 2) but closed at a 1.2% drop for the session. CVX shares tumbled more than 2% over the past five days.

Nevertheless, the tumble was not as severe in the ETF world as expected, with energy ETFs managing to hold some gains over the past five trading days (read: Energy ETFs Rise on Schlumberger Earnings Beat). Despite the fact that many of the key funds in this segment have a double-digit allocation to these two oil giants, ETFs had held up well thanks to encouraging macro prospects and rising oil prices.

Further, though the performance was a disaster for these companies’ stock prices, the short term does not look so bad. Both stocks have a short-term Zacks Rank of #3 or ‘Hold’ rating, suggesting that they are expected to perform with the broader markets.

Below, we have highlighted three popular energy ETFs that are heavily invested in these oil companies. Investors should closely monitor the movement in these funds and grab any opportunity from a continued surge in prices during the months ahead:

iShares U.S. Energy ETF (NYSEARCA:IYE)

This ETF tracks the Dow Jones U.S. Oil & Gas Index, giving investors exposure to the broad energy space. The fund holds about 82 stocks in its basket with AUM of over $1.3 billion while charging a slightly higher fee of 46 bps per year from investors.

Exxon Mobil and Chevron occupy the top two positions in the basket with 23.45% and 13.95% of assets, respectively, while others hold less than 6.4% of assets. This suggests that more than one-third of the fund’s performance is highly dependent on these two oil giants. From a sector perspective, oil & gas producers make up for three-fourths share while oil equipment, services and distribution take the remainder.

The fund gained 0.08% over the past five days and is up 15.82% in the year-to-date time frame. The product has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook.

Energy Select Sector SPDR Fund (NYSEARCA:XLE)

The most popular energy ETF on the market, XLE follows the S&P Energy Select Sector Index, and has amassed about $8.3 billion in its asset base. The fund charges 18 bps in fees per year from investors.

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