Energy Bargain Hunters Plow Record Amounts Into ETFs

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The Fall in Oil Prices
A customer fuels a vehicle at a Mobil gas station in Peoria, Illinois, U.S. The fall in prices has caused several oil companies to cut back spending for 2015. Photographer: Daniel Acker/Bloomberg

Bargain-seeking investors have turned bullish on embattled energy stocks, plowing record amounts into the industry.

More than $3.13 billion went into exchange-traded funds holding stakes in Exxon Mobil Corp., Schlumberger Ltd. and other energy stocks this month, even as the price of oil fell 22 percent, according to data compiled by Bloomberg. That’s four times the average for the year and more than the prior record in December 2007, when oil was trading near $91 a barrel.

“There definitely seems to be evidence of investors seeking to bottom-fish this market and pre-position for 2015,” David Mazza, head of ETF research at State Street Corp., said in a phone interview. “Some investors we’ve spoken with don’t believe the negative picture on energy that’s become consensus.”

Investors are betting on a higher long-term price for crude oil. Brent, the global benchmark, has traded around $60 a barrel since mid-month, after dropping by half from its June high. A stabilization in futures prices since Dec. 15 has helped energy stocks rebound for the past two weeks.

Oil slipped to a five-year low of $56.74 in London. Brent futures have plunged 51 percent from their June high.

“Longer-term investors, two to three years from now, will look back on this and say, ‘God, that was a good buying opportunity,’” said Fadel Gheit, a New York-based energy analyst for Oppenheimer & Co. For short-term investors, “it’s not going to be very pretty for the next few months.”

ETFs are increasingly seen as a bellwether of investor sentiment because they allow broad bets across a sector with lower transaction costs than buying individual stocks. Year-to-date, energy ETFs have attracted $9.25 billion of new money, the most of any sector behind real estate funds and more than triple the same period in 2013.

Analysts Bullish

Analysts remain comparatively bullish on energy, forecasting that 44 companies in the Standard & Poor’s 500 will rise 23 percent in 12 months. That’s more than twice as much as the next-best industry, the materials sector that includes International Paper Co. and Monsanto Co.

The fall in prices has caused several oil companies to cut back spending for 2015. The S&P 500 Energy Index dropped 27 percent from a June high, when oil peaked for the year, through Dec. 15 when prices began to stabilize. The index, which includes Exxon and Chevron Corp., has risen 10 percent since the middle of the month.

Per-share profit for the coming year is expected to rise an average of 69 percent among energy stocks, according to the analysts.

Peel Onion

“If you peel back the onion a bit and look at earnings expectations from analysts and the fundamentals, the picture is not as bleak as it may seem,” Mazza said.

State Street’s Energy Select Sector SPDR Fund, the largest ETF comprising energy stocks, has taken in $1.85 billion this month, the most of any industry-based exchange-traded fund. Almost $460 million was invested in the past week. The ETF is trading at a slight premium to the underlying value of its holdings. A share costs 21 percent less than the June record, when oil prices were above $100 a barrel.

Investors who put money into the State Street SPDR during the prior monthly record for inflows, in December 2007 when the average price was $79.35, saw it climb to above $90 by May. The ETF then declined by more than half as oil prices collapsed during the 2008 financial crisis.

Trading volume in the State Street Energy SPDR this year is 44 times higher than in 2000, according to data compiled by Bloomberg.

The market value of sector-specific ETFs has risen 78-fold since 2000 to $312.6 billion as of yesterday, according to data compiled by Bloomberg. Energy ETFs climbed 129-fold, to $44.4 billion over the same period.

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