Capex Cuts Are Back: What’s in Store for Energy ETFs?

Oil price worries turned so acute that U.S. shale oil producers started mulling over capex cuts all over again. U.S. oil companies ramped up spending this year on stabilization in crude prices which was attained on the back on OPEC output cut deal signed late last year. This spurred U.S. energy companies to restart some of their adjourned projects this year.

However, this very intention of U.S. producers pushed oil prices to the downward spiral despite all OPEC efforts. Even though Saudi and Russia agreed in May to extend their production cuts for nine more months, oil prices continued to feel pressure (read: Saudi, Russia Boost Oil Price: Bet on Leveraged ETFs ).

As a result, WTI ETF United States OilUSO has lost about 13.2% so far this year while United States Brent OilBNO is off about 12% (as of July 28, 2017). In such a downbeat operating environment, U.S. producers have been forced to go back to their capex check mode that they were on two years back (read: Energy ETFs in Focus as ConocoPhillips (COP) Cuts 2015 Capex ).

Inside the Latest Investment Cut Plan

As per , the U.S. shale patch is more careful now than it was three months ago, and is slashing investments to help shore up the long-ailing commodity oil.

ConocoPhillips trimmed the 2017 capital expenditure guidance to $4.8 billion from the $5.0 billion capex outlook announced at the time of the release of 2016 results (read: Energy to Drive Q2 Earnings: Will ETFs Rebound? ).

The source hinted at Anadarko cutting spending by US$300 million. Hess Corporation lowered its projection for E&P capital and exploratory expenditures to $2.15 billion from the previous guidance of $2.25 billion. Whiting Petroleum too pared down the full-year 2017 capital budget plan to $950 million from its prior plan of $1.1 billion in capex. article stressed on Halliburton’s comment that “rig count growth is showing signs of plateauing and customers are tapping the brakes.” Sanchez Energy also plans to reduce its operated rig count from eight drilling rigs to five by the end of September. The company also plans to lower its 2018 capital spending by about $75 million to $100 million.

What Does Less Capex Mean for Oil Companies?

Along with many analysts , we also believe that since less investments and rig counts mean less oil production, prices should rebound in the coming days. And once prices become steady, activity in the oil patch should be started again (read: What Lies Ahead for Oil & Gas ETFs? ).

Investors should note that while lower activity is a negative for oil exploration and production companies, the segment may get some support from recovering oil prices.  If the trend of subdued capex continues for long, energy companies may focus on shareholder value maximization and turn into a value company than a growth one.

At present, value scores of most oil E&P giants are poorer than respective growth scores. However, the capex cuts may change the scenario.

ETFs in Focus

Below, we have highlighted three oil & gas exploration ETFs that are in focus following the companies’ capex guidance cut.

iShares Dow Jones US Oil & Gas Exploration & Production ETFIEO

This ETF invests about $381.0 million in assets in 54 securities, focusing solely on the energy world. Oil & Gas Exploration & Production accounts for about 72.7% of the fund.

iShares U.S. Energy ETFIYE

This ETF holds 69 stocks in its basket with AUM of over $1 billion. The product charges 44 bps in fees per year from investors. Integrated Oil & Gas makes up about 42.1% of the fund followed by 25.4% share in Oil & Gas Exploration & Production and 13.7% in Oil & Gas Equipment & Services.

Vanguard Energy ETF VDE

This fund manages nearly $4.6 billion in asset base and provides exposure to a basket of 134 energy stocks. Integrated Oil & Gas (40.2%), Oil & Gas Exploration & Production (26.6%) and Oil & Gas Equipment & Services (14.8%) are the top three sectors of the fund (see: all the energy ETFs here ).

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US-OIL FUND LP (USO): ETF Research Reports

US BRENT OIL FD (BNO): ETF Research Reports

ISHARS-US O&G (IEO): ETF Research Reports

ISHARS-US EGY (IYE): ETF Research Reports

VIPERS-ENERGY (VDE): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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