The Oil Price This Energy ETF Needs
The Energy Select Sector SPDR (ETF) (NYSE:XLE) is widely regarded as the benchmark exchange traded fund tracking the energy sector, but there are other options, including ETFs that allow investors to combine exposure to U.S. and international oil giants.
Home to over $1 billion in assets, the iShares S&P Global Energy Sector (ETF) (NYSE:IXC) is a credible idea for investors looking for some international flair with their energy ETFs. Dow components Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), the two largest U.S. oil companies, combine for 23 percent of IXC's weight.
Overall, the ETF allocates over 58 percent of its lineup to US-based companies, but that also means there's ample exposure to ex-US oil companies, particularly European oil majors. For example, Royal Dutch Shell Plc (NYSE:RDS-A), BP plc (ADR) (NYSE:BP) and Total SA (ADR) (NYSE:TOT), Europe's three largest oil companies by market value, combine for over 19 percent of IXC's weight, or more than a third of the ETF's ex-US exposure.
IXC's geographic weights are relevant to investors because, sometimes, a company such as Shell or BP could need different prices on oil for break-even production than Chevron or Exxon.
According to our preliminary modelling, Royal Dutch Shell (AA-/Negative), Total (AA-/Negative) and BP (A/Stable) should all be able to cover their capex and cash dividends from operational cash flows if oil averages USD50-60/bbl in 2017, with Total at the lower and BP at the higher end of the price range. These figures are broadly in line with the companies' guidance. Depending on actual prices, major oil companies may continue to report negative organic free cash flows in 2017, but a combination of opex savings, capex cuts and scrip dividends puts them in a safer position, said Fitch Ratings in a recent note.
Not surprisingly, the significant differences in holdings between IXC and XLE can lead to noticeable differences in performance. For example, XLE has outpaced IXC by 250 basis points over the past year, but IXC has been slightly less volatile over that period.
European oil companies are also actively looking to divest non-essential assets to raise cash to shore up their balance sheets.
European oil companies have also announced massive disposal programmes. This should help them reduce their net debt, which increased due to the 2015-16 cash-flow deficits. Disposals are particularly important for Shell after its BG acquisition. The company's ambitious USD30bn disposal target now seems feasible following the announcement of a further USD5bn in assets sales and another USD5bn under negotiation, on top of USD4.7bn received in 2016, adds Fitch.
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