Markets

Energy ETFs Set to Soar as ConocoPhillips Acquires Concho

The energy sector has been hit hard by lower oil prices and the coronavirus pandemic, which has curtailed the demand for oil. The companies in the sector are struggling to raise new capital to restructure heavy debts. Against this backdrop, ConocoPhillips COP has agreed to buy U.S. shale oil producer Concho Resources CXO for $9.7 billion in an all-stock deal.

Deal in Focus

Under the terms of the deal, Concho shareholders will receive 1.46 ConocoPhillips shares for each Concho share they own. The deal values Concho Resources at $49.30 per share. This represents about 15% premium to the closing share price of Concho on Oct 13.

The transaction will create a heavyweight driller in America’s most prolific oil field with an approximately $60 billion enterprise value. The combined entity will be one of the dominant operators in the Permian Basin of West Texas and New Mexico, rivaling the likes of Occidental Petroleum (OXY) and Chevron (CVX) in terms of crude output. It will become the largest independent oil and gas company with production of more than 1.5 million barrels per day (bpd).

The merged company will hold about 23 billion barrels of oil equivalent at an average cost of supply of below $30 per barrel of West Texas Intermediate (read: Energy ETFs & Stocks Surge on Norway Strike & Delta Hurricane).

The transaction will generate about $500 million of annual cost and capital savings by 2022. The deal, which has been approved by the Board of Directors of both companies, is expected to close in the in the first quarter of 2021. It is subject to the approval of both ConocoPhillips and Concho stockholders as well as regulatory approvals.

Market Impact

Following the announcement of the deal, shares of Concho Resources dropped 2.8% to close the day but crushed its average volume as nearly 13 million shares moved hands compared with 2.2 million on average. Meanwhile, shares of ConocoPhillips were down 3.2% (see: all the Energy ETFs here).

The beaten-down prices might be a solid entry point for investors to tap on the opportunity arising from the COP-CXO deal. We have highlighted the number of energy ETFs that have the largest allocation to ConocoPhillips. Investors should keep a close eye on the movement of these ETFs over the coming weeks:

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

This product offers exposure to U.S. companies that are engaged in the exploration, production, and distribution of oil and gas. It follows the Dow Jones U.S. Select Oil Exploration & Production Index, holding 39 stocks in its basket with ConocoPhillips taking the top spot at 16.3% allocation. The ETF has AUM of $121.1 million and trades in volume of 264,000 shares a day, on average. It charges 42 bps in annual fees and expenses and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

VanEck Vectors Unconventional Oil & Gas ETF FRAK

This ETF provides exposure to the unconventional oil and gas segment, which includes coal bed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil, tight sands, in situ oil sands, and enhanced oil recovery. This fund follows the MVIS Global Unconventional Oil & Gas Index, holding 33 stocks in the basket. ConocoPhillips takes the top spot at 8.4% of assets. The product has amassed $8.1 million in its asset base and has an average daily volume of 1,000 shares. It charges 54 bps in annual fees and has a Zacks ETF Rank #5 with a High risk outlook (read: Biden Versus Trump: Impact on ETF Investing World).

John Hancock Multifactor Energy ETF JHME

This ETF offers exposure to 34 stocks that emphasizes factors (smaller cap, lower relative price, and higher profitability) that academic research has linked to higher expected returns. ConocoPhillips occupies the third position with 6.2% share. The product charges 40 bps in annual fees and trades in a paltry volume of around 8,000 shares. It has accumulated $12.3 million in its asset base and has a Zacks ETF Rank #5.

iShares U.S. Energy ETF IYE

This ETF tracks the Dow Jones U.S. Oil & Gas Index, giving investors exposure to U.S. companies that produce and distribute oil and gas. It holds 36 stocks in its basket with COP taking the third spot at 5.8% of assets. The product has AUM of $357 million and average daily volume of about 1.3 million shares. It charges 42 bps in fees per year from investors and has a Zacks ETF Rank #5 with a High risk outlook.

Fidelity MSCI Energy Index ETF FENY

The fund follows the MSCI USA IMI Energy Index, holding 92 stocks in its basket. Of these, COP make up for 5.4% of assets, respectively. The product charges 8 bps in annual fees and trades in a good volume of around 662,000 shares. It has accumulated $388.4 million in its asset base and has a Zacks ETF Rank #5 with a High risk outlook.

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ConocoPhillips (COP): Free Stock Analysis Report
 
Concho Resources Inc. (CXO): Free Stock Analysis Report
 
iShares U.S. Oil Gas Exploration Production ETF (IEO): ETF Research Reports
 
VanEck Vectors Unconventional Oil Gas ETF (FRAK): ETF Research Reports
 
iShares U.S. Energy ETF (IYE): ETF Research Reports
 
Fidelity MSCI Energy Index ETF (FENY): ETF Research Reports
 
John Hancock Multifactor Energy ETF (JHME): 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 Nasdaq, Inc.

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