Energy ETFs In Focus On Big Oil Earnings [iShares Dow Jones US Energy Sector (ETF), Vanguard Energy ETF]

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May 20, 2014 2:07pm NYSE:FENY NYSE:IYE

oil gasBig U.S. oil companies like Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP) reported their results last week for the first quarter. While COP fueled a rally in the broad energy sector, XOM and CVX saw modest decline in their share prices following

the earnings announcement.

Amid the booming shale oil and gas business, the three big oil companies are still struggling with shrinking production volumes. This is especially true as domestic oil and natural gas production at Exxon dropped 5.6% while Chevron oil and natural gas production slipped 3.6%. Conoco experienced a modest production decline of 1.8% in the first quarter.

Earnings for Big Oil Companies in Focus

The largest U.S. oil company, Exxon Mobil, reported earnings of $2.10 per share for the first quarter. Though earnings outpaced the Zacks Consensus Estimate of $1.88 thanks to lower exploration cost, higher natural gas prices and strength in upstream division, it deteriorated from the year-ago earnings of $2.12.

Total revenue dropped 1.5% year over year to $106.8 billion, missing the Zacks Consensus Estimate of $111.4 billion. The lackluster result was primarily due to lower oil and gas output that dropped for the tenth time in the past 11 quarters as well as weak international refining and chemicals businesses (read: Will BP Continue to Fuel Rally in These Energy ETFs?).

Similar to Exxon, earnings at ConocoPhillips – the third largest U.S. oil company – strongly beat our estimate by 24 cents and surged 27.5% from the year-ago quarter. This is mainly thanks to rising output in Texas and North Dakota as well as higher natural gas prices. Revenues rose 9.5% year over year to $16.05 billion and comfortably surpassed our estimate of $15.51 billion.

Chevron, which trails Exxon Mobil, was hit by lower global production and declining oil prices in the quarter. Earnings per share came in at $2.36, falling short of the Zacks Consensus Estimate of $2.53 and declining from the year-ago earnings of $3.18. Revenues fell 6.3% to $53.26 billion and were a far cry of the Zacks Consensus Estimate of $66.45.

Market Impact

The mixed performance from these three giants along with favorable supply/demand trends keeps the broad energy sector on a close watch by investors. Both XOM and CVX have a poor Zacks Industry Rank which is in the bottom 32% while COP has a solid Zacks Rank in the top 10%.

Further, the stocks retain a Zacks Rank #3 (Hold), suggesting more room for upside. The ongoing tension in Russia and more sanctions against the country could disrupt the global oil supply that is considered favorable for the industry. 

ETF Angle

Given this, most of the ETFs having larger allocation to these oil companies are in focus in the coming days. Investors should closely monitor the movement in these funds and grab any opportunity from a surge in the price or avoid these if the stocks drag them down. Below, we have highlighted three funds:

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 85 stocks in its basket with AUM of over $2.4 billion and average daily volume of more than 741,000 shares. The product charges 45 bps in fees per year from investors.

Exxon Mobil and Chevron occupy the top two positions in the basket and take the bigger chunk of assets at 22.20% and 12.08%, respectively. ConocoPhillips on the other hand make up for the fourth position at 4.66%. From a sector perspective, oil & gas producers make up for three-fourths share while oil equipment, services and distribution takes the remainder (read: Energy Exploration ETFs: A Bright Spot in The Choppy Market).

The fund added 0.6% over the past five days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘High’ risk outlook.

Fidelity MSCI Energy Index ETF (NYSEARCA:FENY)

This is the new addition in the energy space that has accumulated $90.2 million in its asset base since its debut six months ago. The fund follows the MSCI USA IMI Energy Index, holding 161 stocks in its basket. Out of these, XOM and CVX take the top two spots at 21.68% and 11.671%, respectively, while COP occupies the fourth spot with 4.33% of assets.

In terms of industrial exposure, oil, gas & consumable fuels accounts for nearly 79% of the portfolio while energy equipment & services take the remainder. The product is the low cost choice in the energy space, charging just 12 bps in annual fees. Volume is light, trading in 52,000 shares a day. The ETF is up 0.6% over the last five trading sessions.

Vanguard Energy ETF (NYSEARCA:VDE)

This fund manages nearly $3 billion asset base and provides exposure to a basket of 163 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index. The product sees a good volume of more than 156,000 shares and charges 14 bps in annual fees.

Here again, Exxon and Chevron are the top two firms with 21.8% and 11.7% allocation, respectively, while COP is the fourth firm making up for 4.2% share. Though the product is skewed toward the integrated oil & gas sector with 38.60% of assets, exploration and production, and equipment services provide a nice mix in the portfolio with double-digit exposure.

VDE added 0.6% in the past five days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘High’ risk outlook.

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