Tag Archives: energy

Can Energy ETFs Regain Fervor On Capital Spending Cuts?

After a seven-month wild run, oil and energy stocks have bounced back strongly in recent sessions following the slew of capital spending cuts by several major players in the industry. This move, along with the latest data that a number of U.S. oil drilling rigs fell the most in 30 years last week, propelled the oil prices higher. In fact, both the crude and Brent surged about 20% in the four days till Tuesday, marking the longest winning streak since January 2009. However, oil price again reversed its four-session rally, dropping 8.7% yesterday after U.S. crude inventories jumped to a record high last week. Notably, crude is currently hovering around $50 per barrel while Brent is trading at over $55 per barrel. Spending Cuts at a Glance A large number of firms whether domestic or international have slashed their capital spending for this year in order to conserve cash balance for dividend payments. The second largest U.S. oil giant Chevron (NYSE: CVX ) trimmed its capital spending by 13% to $35 billion for this year while ConocoPhillips (NYSE: COP ) cut its spending by an additional 15% after reducing it 20% in December. Occidental Petroleum (NYSE: OXY ) reduced its capital spending by 33% to $5.8 billion for this year. European oil majors also followed suit. BP plc (NYSE: BP ) announced spending cuts by 20% to $20 billion for this year from the previous guidance of $25 billion. Royal Dutch Shell (NYSE: RDS.A ) plans to cut capital spending by $15 billion over the next three years while Total SA (NYSE: TOT ) trimmed its capital expenditure by 10% for this year. Further, the Chinese oil major CNOOC (NYSE: CEO ) slashed its capital spending by as much as 35% for this year and Russian oil major Gazprom ( OTCQX:GZPFY ) reduced it by $8 billion. Brazilian state-run energy giant Petroleo Brasileiro S.A. (NYSE: PBR ) or Petrobras also lowered its capital expenditure budget to $31-$33 billion from $44 billion. The efforts taken by these oil giants will likely curb oil production and reduce global supply, and thereby lead to higher oil prices. Market Impact Driven by a slew of investment cut plans, energy stocks and ETFs have made an impressive comeback and are easily crushing the overall market by wide margins over the past five days. In particular, SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) , First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA: FCG ) and PowerShares S&P SmallCap Energy Fund (NASDAQ: PSCE ) gained the most surging in double digits in the same period. Below we profile these ETFs in detail and discuss some of the specifics behind their recent rally: XOP This fund provides equal weight exposure to 83 firms by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. Each holding makes up for less than 2.2% of the total assets. XOP is one of the largest and popular funds in the energy space with AUM of $1.9 billion and expense ratio of 0.35%. It trades in heavy volume of more than 10.4 million shares a day on average. FCG This fund offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 28 stocks in its basket that are well spread out across each component with none holding more than 6.05% of the assets. The fund has amassed $272.7 million in its asset base while charging 60 bps in annual fees. Volume is good with more than 942,000 shares exchanged per day on average. PSCE This fund provides exposure to the energy sector of the U.S. small cap segment by tracking the S&P Small Cap 600 Capped Energy Index. Holding 35 securities in its basket, it is concentrated on the top five firms that make up for 37.9% share. Other firms hold less than 5.4% of total assets. The fund is less popular and less liquid with AUM of $28.6 million and average daily volume of about 24,000 shares. Expense ratio came in at 0.29%. Other energy ETFs were also in deep green over the past five trading sessions. Some of these include IQ Global Oil Small Cap ETF (NYSEARCA: IOIL ) , First Trust Energy AlphaDEX (NYSEARCA: FXN ) , Market Vectors Unconventional Oil & Gas ETF (NYSEARCA: FRAK ) and PowerShares Dynamic Energy Exploration & Production ETF (NYSEARCA: PXE ) . All these are up in upper single digits. What’s In Store? The rally in the energy ETFs seems to be short lived as reduced investments will likely cut supply in the long term and short-term supply with remain intact. As per the latest EIA report, the U.S. crude stockpiles rose 6.3 million barrels in the week (ended January 30), much higher than the market expectation of a 3.7 million barrel increase. Total inventory came to 413.1 million barrels, representing the highest level in at least 80 years. The current threat facing the U.S. oil industry is the strike in the U.S. at nine refineries by the United Steelworkers union. This is the biggest strike since 1980 and will likely curtail crude processing adding to the supply glut. It could affect 10% of the U.S. refining capacity and if the strike turns to be a full-blown crisis, it could threaten about two-thirds of the total refining capacity, indicating more pain for the commodity and the energy stocks.

Preparing For The Rebound In Energy Stocks

Declining oil prices offer investors the same opportunity as declining stock prices: a chance to buy low. Despite short-term uncertainty, the long-term story for oil and natural gas remain unchanged. For investors willing to ride out the volatility, there are a lot of good deals out there. Last month, I wrote about how l ow oil prices are likely to benefit the U.S. economy by acting as a tax cut. That’s great for most consumers, but what if you’re an investor in the energy sector? The price of West Texas Intermediate crude has fallen more than 50 percent since last summer, and despite an uptick in the past few days , there are signs it may keep falling. Subsequently, oil companies are cutting production, laying off workers and re-evaluating their capital spending as their stock prices fall. For investors, though, declining oil prices offer the same opportunity as falling stock prices: a chance to buy low. In the short-term, there’s a lot of disagreement about what oil prices will do and how long they will remain low. The economies of Asia, a key energy consumer, are slowing and Europe is on the verge of deflation. Despite the cutbacks by oil companies, U.S. production is expected to increase at least for the first half of this year, adding to pressure on prices. But the long-term story for oil and natural gas remains unchanged. Hydraulic fracturing has opened up new reserves, but oil and gas remain finite resources. Global demand for energy is not going to wane over the next decade. China and India alone are working to lift billions of their citizens out of poverty and they need energy to do it. Much of that will come from oil and gas. In other words, if you’re willing to ride out some volatility over the next couple of years, there are lots of good investments in the energy sector. For example, you might decide that the outlook for exploration and production is too risky for your investment needs, but the “midstream” business – pipelines, storage and gathering systems – offers more stability. After all, pipeline operators are basically toll collectors. They care less about the price of oil than they do how much of it is moving through their networks. Many pipeline companies are also master-limited partnerships, which offer certain tax benefits to investors. MLPs were popular as the U.S. energy industry boomed, but they remain some of the best buying opportunities in the energy sector. Refiners also offer a way to play off the oil price decline. They have to buy crude oil to process into gasoline and other fuels, so lower oil prices actually help their profit margins. In recent years, several integrated oil companies have spun off their refining businesses, offering investors a broader choice of pure refinery plays. For investors who don’t have the time or the inclination to analyze individual stocks, energy-focused exchange-traded funds offer exposure to the energy space while shielding them from some of the volatility that comes with fluctuating oil prices. With ETFs, you can target a specific sector of the energy industry, such as oilfield services or exploration and production. The midstream business, for example, has an ETF, the Alerian MLP (NYSEARCA: AMLP ), that contains names like Enterprise Pipeline Partners (NYSE: EPD ) and Energy Transfer Partners (NYSE: ETP ). The energy sector ETF is represented by the Energy Select Sector SPDR (NYSEARCA: XLE ), which contains 45 stocks. Remember that the fund is capitalization weighted, so the biggest companies get the biggest allocation in the fund. Accordingly, Exxon (NYSE: XOM ) and Chevron (NYSE: CVX ) alone comprise almost a third of the fund’s assets. The fund charges just 0.15% annually for keeping the fund together and accounted for. If you like the racier service sector, you can buy an ETF for that too. Schlumberger (NYSE: SLB ) and Halliburton (NYSE: HAL ) would be typical holdings in either the PowerShares Dynamic Oil & Gas Services ETF (NYSEARCA: PXJ ) or the Market Vectors Oil Services ETF (NYSEARCA: OIH ). ETFs don’t often change their holdings by buying or selling stocks. That usually results in lower costs and lower taxes than other types of funds. ETFs are also structurally different than a typical open-ended fund like you might see from Fidelity or Putnam. When buyers and sellers of ETFs don’t match up in the open market for shares, underlying securities are added or redeemed from the fund. But unlike an open-ended fund, the underlying share activity takes place in the open market, rather than within the walls of the fund. This means that ETFs are unlikely to generate a year-end capital gain distribution. This provides better deferral of taxable profits and adds compounded return to shareholders. Because of their concentrated risk, ETFs offer investors the chance to get the most out of the energy rebound. Be aware, though, that in the short-term, they also can intensify any additional decline in oil prices. Given the long-term outlook for global oil demand, it’s a risk that for many investors may be worth taking. Disclosure: The author is long XLE. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

NRG Energy: Bolstering Solar Infrastructure With Partial Acquisition Of Verengo

Summary NRG Energy recently acquired Verengo Solar’s Northeast U.S. sales and operations teams, adding on to a list of recent solar acquisitions. The sale of the previous residential solar standout Verengo has been a golden opportunity for NRG Energy to bolster its infrastructure. The addition of Verengo’s sales and operations teams will significantly strengthen NRG Energy’s Northeast residential solar segments. The acquisition-heavy strategy of NRG Energy’s solar segment is in keeping with the vertical integration and consolidations taking place within the distributed solar industry. While NRG Energy’s highly ambitious residential solar strategy is fraught with risks, the potential payoff is enormous. NRG Energy (NYSE: NRG ) has accelerated its move into the distributed solar industry over the past few months. With wild ambitions of overtaking SolarCity (NASDAQ: SCTY ) as the top residential solar company in a few years time, NRG Energy is wise to move into the distributed solar space as fast as possible. The company has already set up a huge distributed solar infrastructure, with its CEO even claiming that the company has “an embedded SolarCity within it. ” In fact, the company is already proclaiming that it will beat out Vivint Solar (NYSE: VSLR ) for the number 2 spot by the end of 2015, which is a tall order considering the companies’ currently huge market share disparity, and Vivint Solar’s rapid growth. NRG Energy has recently announced that it had bought out Verengo Solar’s Northeast U.S. sales and operations planning teams, which marks the latest in a series of ambitious acquisitions. Over the span of a year, the company has acquired the likes of Roof Diagnostics and Solar Pure Energies Group, clearly showing NRG Energy’s intentions of making a big entrance into the residential solar arena. The company’s most recent buyout of Verengo’s NorthEast S&O teams highlights its almost frenzied approach towards residential solar. Verengo Advantage Verengo Solar was the #3 distributed residential solar company before the company’s baffling decision to put itself up for sale. Verengo Solar already has a strong presence in the NorthEast, which was the primary reason for its NorthEast sales and operations teams’s acquisition by NRG Energy. Kelcy Pegler Jr., who is the head of NRG Energy’s solar segment, stated that the acquisition “solidifies some advantages we have, and we have a ton of momentum in the Northeast.” While the reasons behind Verengo’s sale are somewhat confusing (especially in light of the fact that its sale occurred right after the company reached the number 3 spot ), it represents a golden opportunity for NRG Energy to snatch up some of Verengo’s talent. Given NRG Energy’s relative lack of experience in the distributed solar arena, Verengo’s employees complement NRG Energy perfectly. The company’s addition of Verengo’s Northeast sales and operations teams will certainly make the NRG Energy’s rapid transition into residential solar a much smoother one. Trend of Vertical Integration Given NRG Energy’s relatively late start and aspirations for solar dominance, it is only logical for the company to pick up whatever advantages they can through acquisitions. Thus far, NRG Energy has wisely acquired companies that already have infrastructures in place to augment its own, rather than wasting time by building its entire distributed solar infrastructure from scratch. The frequency of such acquisitions are not surprising given the fact that intense consolidations are still occurring among top residential solar companies. The distributed solar industry has gone through a rapid trend of vertical integration and market share consolidation over the past few years. The larger corporations like SolarCity and Vivint Solar have increasingly pushed out more regional competition, implying that vertical integration is not only beneficial, but also essential for success in the distributed solar arena. Vertical integration reduces logistics costs and more importantly, allows for unified system cost-reductions. Such unified cost reductions would be impossible if different segments of distributed solar, such as financing, installations, inverters, etc, were operating under separate entities with varying goals. Bringing all these elements under one roof allows for a more focused, and cohesive approach. This graph depicts the residential solar market share consolidation that has occurred over the past few years. This consolidation has largely been a result of the vertical integration taking place among the top companies, which has pushed out weaker and more regional competition. Note that this graph only captures up to quarter 1 of 2014. As of quarter 2 of 2014, SolarCity and Vivint Solar (the #1 and #2 installers) already have a combined market share of more than 50% . Amazingly, this means that consolidation is actually accelerating, despite the already top-heavy dominance of the solar industry. (click to enlarge) Source: GTM Research NRG Energy has clearly studied these distributed solar market trends, and is applying such knowledge to its own residential solar business model. The company emphasized the important of vertical integration by stating that “it’s an ever-consolidating space in residential solar” and that “with the corporate sophistication of NRG as a Fortune 250 company… it really puts us in an advantaged position to bring on team members, like Verengo, and leverage our position in the space to become the ultimate winner.” Risks Making such an ambitious entrance into a new industry comes with massive risks. NRG Energy has taken the decidedly riskier route of acquiring numerous companies/teams in order to bolster its distributed residential solar infrastructure, rather than growing in a completely organic fashion. While the company has indeed grown many parts of its solar infrastructure organically, such ambitious goals cannot be achieved through organic growth alone. This could very well be the primary motivating factor for the company’s heavy acquisitions strategy. Of course, if NRG Energy’s plans do not pan out, the company would have essentially wasted hundred of millions, and perhaps billions of dollars acquiring and building out its massive residential solar infrastructure. Despite such risks, the rewards are almost certainly worth it, as distributed solar is a potentially transformative industry. If NRG Energy can manage to grab a foothold of this market in its early stages, the company should be rewarded its initial investment many times over. Conclusion While companies like SolarCity and Vivint Solar have already cemented themselves as leading distributed residential solar companies, large portions of the industry’s market share are effectively still up for grabs. The industry is, after all, still in relatively in its infant stages, which means that sufficiently motivated new industry players could muscle their way in. If NRG Energy manages to succeed at even a fraction of its ambitions, the company is set to gain immensely. Given potential market size of distributed generation, and the exponential growth path of solar power, NRG Energy is making an incredibly smart move by moving into the distributed residential solar arena. If NRG Energy keeps up its distributed solar ambitions, the company is set to gain immensely. Disclosure: The author is long SCTY. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.