Obama Eases Oil Export Ban, Energy ETFs Slip - ETF News And Commentary


All eyes have been on the energy sector over the past few months as geopolitical tension in Russia and escalating violence in Iraq hit headlines. Now, the relaxation of the four-decade restriction on crude oil exports by the Obama administration has again compelled investors to turn their attention to this corner of the broad market (read: 3 Energy ETFs to Watch on Iraq Turmoil ).

The U.S. Commerce Department has initially allowed two companies - Pioneer Natural Resources ( PXD ) and Enterprise Products Partners ( EPD ) - to export ultra-light oil, often referred to as condensate, after minimal refining in a distillation tower. Export of oil, permitted from the facilities in the fields of south Texas, will likely begin as early as August.

The move has come at the time when the U.S. oil market is already witnessing a supply glut. This is especially true as oil production in the U.S. reached its highest levels in 28 years thanks to shale formations, and newly tapped oil and gas fields in North Dakota and Texas.

The ruling has spread fears that condensate export would be extended to more U.S. companies, leading to a tight oil market. This would narrow the gap between the U.S. and international oil prices thereby weakening refiners' margin, as producers will sell oil at international prices. As such, international prices will likely fall and U.S. prices would rise. In fact, this phenomenon was already witnessed on the day of the announcement of the oil export ban easing. The spread between the two oil prices narrowed to $7.50 per barrel on June 25.  

With that being said, the approval for the first oil exports from the U.S. in 40 years has triggered a broad sell-off in the oil refineries stocks. Valero Energy ( VLO ) and Marathon Petroleum ( MPC ) saw the one-day biggest decline of 8.3% and 6.3%, respectively, in almost three years while PBF Energy ( PBF ) tumbled 11% on the day. HollyFrontier ( HFC ) and Phillips 66 ( PSX ) also dropped 6.7% and 4.2%, respectively.

On the other hand, oil and gas exploration and production companies that are engaged in condensate, rallied on the news. SM Energy ( SM ), Rosetta Resources ( ROSE ) and Pioneer climbed 5.2%, 3.7% and 3.5%, respectively (read: Energy Exploration ETFs: A Bright Spot in The Choppy Market ).

After measuring the pros and cons of this export clearance, some energy ETFs draw our attention. Investors should closely monitor the movement in these funds over the coming days and could catch the opportunity from any surge in the related stock prices, or avoid these if the companies seemingly drag them down.

SPDR S&P Oil & Gas Exploration & Production ETF ( XOP )

This fund provides exposure to the oil and gas exploration segment of the energy space by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $1.3 billion in its asset base and trades in heavy volume of more than 3.7 million shares per day. The ETF charges 35 bps in annual fees from investors.

Holding 87 stocks in its portfolio, the product provides equal weight exposure across a number of firms as each holds less than 1.5% of total assets. Further, it is widely diversified across market caps with small caps accounting for 41%, large caps taking 30% and mid caps having 30% allotment. However, more than three-fourths of the portfolio goes to exploration and production firms while refining and marketing, and integrated oil & gas take the remainder (see: all the energy ETFs here ).

The ETF lost nearly 1.6% over the past five trading sessions and has a Zacks ETF Rank of 4 or 'Sell' rating with a High risk outlook.

iShares U.S. Oil & Gas Exploration & Production ETF ( IEO )

This ETF follows the Dow Jones U.S. Select Oil Exploration & Production Index and holds 76 securities in total. The product has been able to manage assets worth $581.3 million and trades in good volume of 102,000 shares per day. The ETF charges 46 bps in fees and expenses.

The product is largely concentrated on the top firm - Conoco Phillips ( COP ) - which makes up for a 13.8% share in the basket while other securities hold less than 8.4% of assets. IEO is a large cap centric fund as 81% of assets go to this market cap level. In terms of industrial exposure, exploration and production firms account for 71% share while integrated oil & gas take the remainder portion in the basket.  

The fund was down 1.4% in the past five days but has a Zacks ETF Rank of 1 or 'Strong Buy' rating with a High risk outlook (read: T Top Ranked Energy ETFs and Stocks Set to Roar Higher ).

PowerShares Dynamic Energy Exploration & Production ETF ( PXE )

This product is the high cost choice in the space, charging 65 bps in fees per year from investors and trading in low volume of 35,000 shares per day. This is because the fund follows the Dynamic Energy Exploration and Production Intellidex index, a benchmark that selects stocks on a variety of investment criteria: price momentum, earnings momentum, quality, management action, and value.

With AUM of $150.2 million, the ETF is pretty well spread out across 30 securities. None of these holds more than 5.3% share. While large cap accounts for 45% of assets, mid and small cap takes 33% and 22% share, respectively. Here again, three-fourth of the portfolio is concentrated on exploration and production companies and the rest in refining and marketing.

PXE lost about 2% over the past five trading sessions and has a Zacks ETF Rank of 4 with a High risk outlook.

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SPDR-SP O&G EXP (XOP): ETF Research Reports

ISHARS-US O&G (IEO): ETF Research Reports

PWRSH-DYN ENRG (PXE): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: XOP , IEO , PXE



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