Strong Earnings Put Unconventional Oil ETF In Focus [Anadarko Petroleum Corporation, EOG Resources Inc]

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May 23, 2014 2:29pm NYSE:FRAK

oil-etfThe U.S. economy’s goal to gain self sufficiency in its energy needs led to new hydraulic fracturing (fracking) methods and a boom in unconventional oil production. A pure-play on unconventional energy world – Market Vectors Unconventional Oil & Gas ETF (FRAK)

– will likely be a true beneficiary of this aim. This two-year old fund has returned about 12% since inception, about 27% in the last one year and 12.3% so far this year.

This solid trend is likely to continue with upbeat first quarter results fromAnadarko Petroleum Corp.’s (APC) and EOG Resources Inc. (EOG), and mixed-bag performance from Occidental Petroleum Corporation (OXY). All three reported earnings on May 5.

Anadarko’s Q1 Earnings in Focus

Anadarko Petroleum’s adjusted earnings of $1.26 per share outdid the Zacks Consensus Estimate by 5.9% and the year-ago numbers by 16.7%. The company’s total revenue of $5.84 billion came ahead of the Zacks Consensus Estimate by 46.5%. Reported revenues also surged a whopping 50.1% year over year.

The revenue rise reflects solid natural gas, crude oil & condensates and liquids sales. The company also raised the midpoint of its full-year sales-volume guidance by 3.5 million barrels of oil equivalent.

EOG Resources’ Q1 Earnings in Focus

The company reported adjusted earnings of $1.40 per share which came well past the Zacks Consensus estimate of $1.17 per share and were 55.6% higher than the year-ago level. Total revenue grew 21.7% year over year to $4.1 billion and surpassed the Zacks Consensus Estimate of $4.0 billion (read: 3 Oil ETFs Stand Out on Russian Tensions).

Improving crude and liquids production were behind this improvement. Not only this, the target for crude oil production in 2014 was raised to 29% from 27%. EOG also raised its total production growth target for 2014 to 12% from 11.5%.

Occidental’s Q1 Earnings in Focus  

Occidental Petroleum’s earnings of $1.75 per share beat the Zacks Consensus Estimate by 2.9% and improved 3.6% from the prior-year earnings. Total revenue came in at $6.1 billion (up 3.7%), lagging the Zacks Consensus Estimate of $6.2 billion by 1.5%.

Market Impact 

Pushed by the better earnings picture, the trio clocked gains following the results.  Anadarko, EOG and Occidental added about 1.58%, 4.42%, 1.81%, respectively, in the past week.  All three stocks have sizable share in FRAK leading to decent gains in the fund too in the key trading session despite a flat run last week probably due to the broader market sell-off.

Investors should note that Anadarko’s Zacks industry rank falls in the top 24%, while EOG and Occidental’s industry ranks are in the top 19% and 8%, at time of writing.  The stocks are presently boasting favorable Zacks Ranks as well. All in all, thanks to impressive earnings and better industry positioning, FRAK could definitely be an energy ETF to keep an eye on for the future.

FRAK in Detail 

This ETF provides exposure to the unconventional oil and gas segment, which includes coal bed methane, coal seam gas, shale oil & gas, and sands market. This fund follows the Market Vectors Global Unconventional Oil & Gas Index, holding 58 stocks in the basket. Volume and AUM are quite low for this large cap focused fund while the expense ratio is at 0.54%.

Top three components include Anadarko, Occidental and EOG with a combined share of nearly 23% of total assets. Exploration & production takes the top spot in terms of sector exposure, while oil & gas integrated contribute decently as well (read: A Comprehensive Guide to Oil & Gas ETFs).

The ETF has added 11.4% in the year-to-date time frame and has a decent Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

Bottom Line

Oil prices normally exhibit volatile trends and a worldwide supply glut is restraining the prices at present. Still, the long-term outlook for unconventional oil and gas might prove long-term bulls due to the pickup in economic activity especially in the developed region of the world, growing global population, possible output crisis in many of the world’s key oil fields as these approached almost peak production levels.

Natural gas prices at present are in better shape thanks to a severe winter and the resultant plunge in inventory.

However, somewhat bearish near-term sentiments are agreeably in place in the oil sector on surplus supply concerns. Domestic production is now at highest levels since 1988 and Libyan oil exports are also on the rise after months of political crisis.

Those investors taking near-term drivers too seriously may want to consider staying on the sidelines for the time being. But risk-tolerant long-term investors may want to ride out volatility for the enduring potential of this in-focus sector.

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