Pivotal Earnings Season Ahead For Energy ETFs

By most accounts, this has been a good year to be long energy stocks.

The Energy Select Sector SPDR (NYSE:XLE), the iShares Energy ETF (NYSE:IYE) and the Vanguard Energy ETF (NYSE:VDE), three of the most popular U.S.-focused energy funds, are up an average of 14.6 percent year-to-date.

Sounds good until realizing the SPDR S&P 500 (NYSE:SPY) is up 17.1 percent, a gain that has been accrued with 410 basis points less volatility than XLE.

In the past three months, Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), the two largest U.S oil companies and the two stocks that dominate the aforementioned ETFs, are each up about three percent.

However, SPY is up just over four percent and the U.S. Oil Fund (NYSE:USO) has surged nearly nine percent.

With energy sector earnings set to start flowing toward the end of this month, investors should take this time to evaluate the energy ETFs they currently hold. Barclays analysts looked at 18 major oil and refining companies and said they expect collective earnings of $24.3 billion, down 16 percent quarter-over-quarter but up one percent year-over-year, according to MarketWatch.

Barclays expects Exxon, Chevron and ConocoPhillips (NYSE:COP) to report second-quarter per share earnings that below the first-quarter results. Beyond the major oil producers, the bank is not enthusiastic about previously high-flying refiners. Barclays said it lowered its earning estimates for refiners by 18% in the second quarter, by 24 percent for the full year 2013, and by 21 percent in 2014, MarketWatch reported.

There are no ETFs explicitly devoted to refiners, but some have benefited more than others due to larger weights to this energy sub-sector. A disappointing batch of earnings from refiners could weigh on ETFs such as the Guggenheim S&P 500 Equal-Weight Energy ETF (NYSE:RYE) and the iShares U.S. Oil & Gas Exploration & Production ETF (NYSE:IEO).

In fairness to IEO, the fund has been one of the top-performing large U.S. energy ETFs this year with a gain of 16.5 percent, but three refiners Phillips 66 (NYSE:PSX), Marathon Petroleum (NYSE:MPC) and Valero (NYSE:VLO) are found among the fund's top-10 holdings.

There is a scenario under which IEO can keep the good times going and it boils down to Occidental Petroleum (NYSE:OXY) and EOG Resources (NYSE:EOG). Those stocks, which are each up more than 10 percent in the past 90 days, combine for more than 21 percent of the ETF's weight. If Occidental and EOG keep moving higher, IEO should be able to endure refiners' downside.

No Help From Overseas Global oil majors have provided no relief to investors and do not look like attractive alternatives to their U.S. peers at this point. Even an almost 54 percent weight to U.S. stocks has not stopped the iShares Global Energy ETF (NYSE:IXC) from turning in a middling 4.5 percent gain this year.

It is not the ETF's fault. Rather, management at European oil majors can be blamed. European oil majors such as Royal Dutch Shell (NYSE: RDS-A), BP and Total (NYSE:TOT) allocate 54 percent of their annual capital budgets just to keep production declines in the range of four to five percent, the Wall Street Journal reported, citing Goldman Sachs.

Shareholders, and rightfully so, have become irritated by this because those expenditures could and probably should be going to more lucrative projects, buybacks and dividends. Those stocks along with BG Group combine for almost 19 percent of IXC's weight.

Still, IXC has looked downright peachy compared to those ETFs with substantial allocations to state-run, emerging markets-based energy firms. This is how bad state-run emerging markets energy stocks listed on the New York Stock Exchange have been this year: PetroChina (NYSE:PTR) is one of the better performers with a loss of nearly 21 percent. Brazil's Petrobras (NYSE:PBR) and Colombia's Ecopetrol (NYSE:EC) are down an average of 35.6 percent year-to-date.

That is to say investors intent on sticking with large-cap energy stocks should avoid emerging markets.

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