If you drive a lot, you are suffering whenever you pull into a gas station.
But you might make up for some of that pain at the pump by investing in oil companies that appear to be in a particularly sweet spot. Gas prices are high, in part, because they are declining to invest in increasing domestic supply.
Three ETFs, listed below, can provide broad exposure to the sector that still has a favorable supply-and-demand setup.
High oil prices — and more shortages ahead
As U.S. gas prices come closer to doubling from a year ago, President Joe Biden has called the high prices part of an “incredible transformation” that will make the U.S. stronger over time during the transition to clean-energy sources.
Meanwhile, only about 3% of U.S. autos are electric vehicles, and there are numerous repots of EV travelers inconvenienced by a barely viable network of fast chargers that may actually charge an EV quite slowly, assuming they work at all.
Even before the disruptions this year from Russia’s invasion of Ukraine, moves by other European countries and the U.S. to keep Russia from selling its oil into the world market and price increases by oil producers, the stage was set for fuel prices to rise because of a combination of rising demand and underinvestment in increasing (or even maintaining) supply:
The chart was provided by Sam Peters, a portfolio manager at ClearBridge Investments, and most recently included in this article on May 11 that included energy-stock selections by Peters and other money managers.
The left side of the chart shows that oil industry capital expenditures had increased during previous periods of low supply. But the right side of the chart shows that capital spending fell very low last year as inventories were declining.
Myriad comments this year from U.S. oil and gas industry executives have emphasized their plans to continue focusing on allocating capital efficiently and returning cash to investors through dividends and share buybacks. They don’t want to be burned again by overinvestment only to suffer if prices crash again, as they did during the early stages of the pandemic in 2020 and in 2014 following a previous peak for WTI over $100.
Simon Wong, an analyst with Gabelli Funds in New York, said during an interview in May that “[i]f oil stays above $80, these companies can still produce a lot of free cash that they can return to shareholders.”
An example of a company focusing on capital return, with an apparent cushion against a decline in lower oil prices, is Pioneer Natural Resources Co.
Pioneer CEO Scott Sheffield said during the company’s earnings call on May 5 that “if oil prices were to average $60 for the remainder of the year, Pioneer shareholders would receive approximately $17 in dividends per share [including special dividends]. At $120, approximately $31.” That’s according to a transcript provided by FactSet. During 2021, Pioneer’s regular and special dividends to shareholders totaled $6.76 a share.
Three energy ETFs for broad industry exposure
Back on Feb. 10, we screened the holdings of three exchange traded funds that hold energy stocks. Here’s how they have performed since the close on Feb. 9:
Price increase – Feb. 9 through June 3
Increase in rolling forward EPS estimate – Feb. 9 through June 3
Forward P/E – June 3
Forward P/E – Feb.9
Energy Select Sector SPDR Fund
iShares Global Energy ETF
iShares S&P/TSX Capped Energy Index ETF
For two of the three ETFs, the price increases haven’t kept pace with increases in consensus forward earnings estimates. (For the same period, WTI increased 33% based on front-month contract prices.) For comparison, the SPDR S&P 500 ETF
trades at a much higher forward P/E of 18.6.
A combination of these three ETFs might make for reasonable, diversified long-term investment in energy suppliers. Here’s how the ETFs differ:
The Energy Select Sector SPDR ETF
tracks the energy sector of the S&P 500
This is a group of 21 stocks, weighted by market capitalization, which means Exxon Mobil Corp.
and Chevron Corp.
make up 43% of the portfolio.
The iShares Global Energy ETF
holds 46 stocks, including all the stocks held by XLE. It adds exposure to large non-U.S. producers, such as Shell PLC
and BP PLC
The five largest holdings make up 45% of the portfolio.
The iShares S&P/TSX Capped Energy Index ETF
holds 20 stocks of Canadian energy producers. It is also heavily concentrated, with the largest three holdings, Suncor Energy Inc.
Canadian Natural Resources Ltd.
and Cenovus Energy Inc.
making up half the portfolio. The ETF has 2 billion Canadian dollars in total assets, with an expense ratio of 0.63%.
For the non-U.S. companies listed above, the first ticker is for its local company listing, while the second is for its American depositary receipt.
You can click on any of the ETF or company tickers for much more information.
Read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.