Oil Stocks Keep Rising and This is The Easiest Way to Bet On It
The market repercussions were swift, with the S&P energy sector moving out of bear market levels. The easiest way to make a broad bet on a continued surge in energy stocks is exchange-traded funds rather than than attempting to pick individual winners in the sector. Recent trading history suggests the gains may continue.
The
SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose on
Monday, with about 40% of the components moving higher by 10% or more. After
similar gains by the XOP, the bullish trend tends to continue, according to a
CNBC analysis of Kensho, a data analytics tool used by Wall Street banks and
hedge funds to identify profitable trading opportunities.
In
the past five years XOP has jumped more than 5% in a single trading session on
13 occasions. Two weeks later, the ETF typically adds another 3.5%, trading
positively about 70% of the time, according to Kensho data.
A
separate CNBC analysis of Kensho that looked at stocks in the Dow Jones
Industrial Average found that after oil rises 5% or more in a single day,
Chevron has been the top-performing stock. That is based on data showing WTI
crude prices have risen 5% or more 75 times since 1999.
The
bigger, disciplined, shareholder-friendly oil companies like Chevron that are
favored by long-term focused investors won’t move as much as the smaller
players that have more leverage to a rise in oil prices.
The
rally in the energy sector on Monday was led by small and mid-cap explorers
that are heavily shorted, according to Citi’s energy analyst Scott Gruber,
including Extraction Oil & Gas and Whiting Petroleum, both XOP holdings.
XOP
invests in a lot of small- and mid-cap stocks in the oil and gas exploration
sector. XOP holds highly levered stocks that decline a lot on concerns about
debt and bounce quickly when surprise events like the Saudi oil production
attack materialize.
It
is not the only ETF play on oil and gas exploration. There also is the iShares
Dow Jones US Oil and Gas Exploration and Production (IEO), but there is an
important difference in the underlying indexes: IEO is market-cap weighted; XOP
is equal weighted. That means XOP holds many smaller-cap energy companies and
holds them at roughly equal percentages, while IEO is weighted to larger market
capitalization companies. The average market cap is roughly $7 billion higher
for IEO than XOP — $30 billion versus $23 billion.
That
also means XOP could go up more if the energy sector and crude oil continue to
rise. XOP was up more than 10% on Monday, while IEO was up more than 6%.
XOP
also is slightly cheaper than IEO — with a 35 basis point expense ratio versus
42 basis points for IEO.
One
caveat to the ETF trades, including XOP, is exposure to oil refinery stocks.
The
ETF’s overall weighting is three-quarters oil and gas exploration stocks, but
it has roughly 19% in oil refiners. Some of those stocks took a hit from the
Saudi attack as many U.S. facilities depend on heavy crude supplied by
countries including Saudi Arabia.
PBF
Energy and Valero Energy, both among the top 10 holdings in XOP, and among the
refiners that rely on imported Saudi crude, were hit hard on Monday, with PBF
declining by as much as 10%.
But XOP’s equal-weighting approach means it does not have a weighting above 2.5% to any single stock, limiting the impact of any single stock decline, and some other refiners in its top 10 were surging on Monday, such as HollyFrontier, up roughly 5%. Half of XOP’s top 10 holdings are in the refining business.