Energy Funds Winning on Debt Ceiling Deal (XLE, IYE, VDE, IXC)

The price of crude oil has responded quickly to the news that an agreement on the US debt ceiling has been reached. Though the deal still needs final votes for approval, the nearly immediate reaction in the spot oil market could indicate that we’re on the verge of another jump in crude prices to more than $100/barrel.

Three large energy ETFs have been moving in near lockstep for the past 12 months, posting gains of more than 40%. The Energy Select Sector SPDR (NYSE: XLE), the iShares Dow Jones US Energy (NYSE: IYE), and the Vanguard Energy ETF (NYSE: VDE) track one another nearly exactly. The
iShares S&P Global Energy ETF (NYSE: IXC) has also posted a gain over the past year, but the gain is nearer 30%. The main difference between IXC and the others is IXC’s exposure to global producers whereas the others focus exclusively on US stocks.

The Energy Select Sector SPDR (NYSE: XLE) posted a gain of more than 44% in the past year, and has gained nearly another 13% this year. The last three months have seen a negative move in the fund as the price of crude has retreated amid worries over a possible US debt default. Shares are trading about 1.67% higher in the pre-market this morning, at $76.45, in a 52-week range of %50.33-$80.97.

The iShares Dow Jones US Energy (NYSE: IYE) has returned a gain of nearly 43% in the past 12 months and year-to-date gain of 12.61%. Like XLE, the past three months have been negative. Shares closed down about -1% on Friday, at $43.60, in a 52-week range of $29.12-$46.12.

The Vanguard Energy ETF (NYSE: VDE) gained more than 44% over the past year, and its year-to-date gain is 12.66%. The last three months have been negative for VDE as well. Shares closed down nearly -1% on Friday, at $112.29, in a 52-week range of $73.85-$118.43.

The iShares S&P Global Energy ETF (NYSE: IXC) has posted a one-year gain of around 32% with a year-to-date gain of 7.82%. Shares have lost more than -7% in the past three months. Shares closed down nearly -1% on Friday, at $41.65, in a 52-week range of $30.00-$45.61.

The global nature of IXC, which includes holdings in BP, Total, Shell, and Petrobras among others, is the difference between this fund and the others and is very likely the main contributing cause to IXC’s inability to match the returns of the other funds. Exxon and Chevron are common to all the funds and each has staggered in the past three months. As have Shell and Total, which is down nearly -10%. Italy’s Eni is off nearly -14% and Canada’s Suncor is down nearly -16% over the past three months.

All the negativity on the integrated and E&P stocks is due to production declines even while prices remain high. European stocks have more exposure to production disruptions from Libya, and BP is still trying to recover from last year’s Gulf of Mexico disaster. While it makes sense to assume that the foreign producers will do better as prices rise, that is only interesting to investors if production declines can be reversed.

Right now, declines to larger European oil & gas companies could be irreversible until the situation in Libya is resolved. Eni, and to a lesser degree, Total need to Libyan oil to come back. Political stability in North Africa would also help. These results will have a positive impact on the outlook for some of the larger holdings of IXC and are worth keeping a watch for.

Paul Ausick