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April 9, 2015

$5.7 Bn in ETF Riding on The Recovery of U.S. Energy Stocks

By Joseph Ciolli, First Enercast Financial

The worst earnings season for energy companies since 2009 isn’t stopping investors from favoring the industry above all others this year.

Exchange-traded funds tracking oil and gas shares have absorbed $5.7 billion in 2015, the most inflows among 12 groups tracked by Bloomberg. Energy shares may get a boost from Royal Dutch Shell Plc’s acquisition of BG Group Plc, after the oil and gas industry’s biggest deal in at least a decade spurred speculation of further consolidation.

Strategists are forecasting a 63 percent contraction in first-quarter earnings for energy companies in the S&P 500, after predicting expansion as recently as October, Bloomberg data show. That shift, spurred by an almost 60 percent drop in crude, presents an opportunity for investors looking for companies that might be able to beat profit predictions, said Terry Morris of National Penn Investors Trust Co.

“It wouldn’t surprise me if we find out that we’ve notched expectations down a little too far,” Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust, said by phone. “You may see energy companies report terrible earnings but rise because it’s already built in.”
ETF Flows

The $5.7 billion sent to energy ETFs this year compares with $5.1 billion for health-care companies, the second-best group among the 12 industries. Energy funds have also been the most attractive to investors over the last month, drawing $2.9 billion, twice the next-most-popular industry. They attracted $300 million on Tuesday alone.

Energy stocks have been rebounding after plummeting as much as 27 percent from a record high in June. Oil and natural-gas stocks in the Standard & Poor’s 500 Index have climbed 4 percent since the start of last week, four times the performance of the benchmark gauge during the period. The gains have come as oil prices rebounded 22 percent from a six-year low last month. The group of stocks added 0.1 percent today as of 9:43 a.m. in New York.

“If you’re a believer that the current oil glut is temporary and will clear itself eventually, this will be a good entry point,” Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, New Jersey, said by phone. “As long as you believe that the global economy is fine and have plenty of time to wait it out, entering now makes some sense.”
Big Deal

Large energy companies are looking for ways to cut costs and restore profits, an effort highlighted by Royal Dutch Shell’s $70 billion acquisition of BG Group. The deal is the most significant response yet to the slump in oil prices and may set in motion a series of mergers.

To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant buyback of $25 billion from 2017 to 2020.

“Certainly this Shell deal is going to be an indication to some that a bottom has been put in energy to an extent,” Steve Bombardiere, an equity trader at Conifer Securities LLC in New York, said by phone.

For the time being, oil and gas producers are poised to announce the worst quarterly profits since the second quarter of 2009, according to estimates compiled by Bloomberg. Exxon Mobil Corp., the largest U.S. energy company, is forecast by analysts to see earnings contract 59 percent. Profit at Chevron Corp., the second-largest, is expected to decline 72 percent, the data show.

Companies have tried to counteract falling sales and conserve capital by scaling back capital expenditures and share repurchases.
Spending Reductions

ConocoPhillips, the third-largest U.S. energy producer, announced on March 17 it will extend capital spending cuts through 2017 as it sees oil prices remaining low. As of March 11, energy companies worldwide had so far in 2015 announced spending cuts from last year of about $94 billion, an average of 37 percent, to conserve cash as revenue falls, according to data compiled by Bloomberg.

The profit growth outlook for the sector remains poor for the rest of the year. The group is forecast to see earnings contraction of more than 39 percent in each of the last three quarters of 2015, according to strategist estimates compiled by Bloomberg.

Nevertheless, traders are making bullish bets in the options market. Contracts on the SPDR Energy Select Sector Fund cost 5.58 points more than those on the SPDR S&P 500 ETF Trust on April 6, according to six-month implied-volatility data compiled by Bloomberg. That was the narrowest spread since Oct. 9 and compares with an average of 8.08 points in the past six months.
Options Data

Short interest in the iShares U.S. Energy ETF, or bets that the stock will drop, fell to 0.22 percent of shares outstanding last week, the lowest since Jan. 6, according to data compiled by Markit Ltd.

“I’m not sure the crowd is as negative on energy as they were a few weeks or months ago,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said by phone. “People are looking for some place to go. If buying on weakness is done in moderate amounts in a balanced portfolio, it’s something that can make people happy over a longer period of time.”

Courtesy First Enercast Financial (Article Archive Here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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