- Crude oil prices surged a lot, but energy stock ETF prices didn’t reach pre-pandemic levels.
- There are a dozen reasons why companies can earn big and pay a fat dividend for many more years to come.
- Oil prices may continue rising; even a price explosion is possible if investments in new fields stay low.
- Crude is only a part of the business model. See chemistry, electric car recharging, natural gas, or carbon capturing and storage.
- The risk-reward rate in the industry seems to be fair.
Benefits And Chances of Energy Stock ETF Investments
1. High Dividend Yields in ETFs with Big Oil
The dividend yields of some significant energy stock ETFs containing Big Oil companies are very high, 3-5 percent p. a., by the list on ETFdb.com. For example:
- XLE (Energy Select Sector SPDR Fund): 3.75 percent p. a.
- FILL (iShares MSCI Global Energy Producers ETF): 3.03%
- IXC (iShares Global Energy ETF): 3.76%
- VDE (Vanguard Energy ETF): 3.19%
2. The Dividend Yields May Increase
Dividend yields represent the past, but oil surged a lot in the last months and reached 2018-2019 levels. Dividends may increase in the future. Some companies already boosted their dividend payments in the previous months, for example, Chevron, to $1.34 from $1.29 this spring.
3. I’m Missing The Leverage Effect of Mining Stocks
Fixed costs do not increase as crude becomes more expensive, so firms’ profits could rise much more than oil prices. We also see this in other mining companies. The rise in the price of raw materials increases the profits of the mines to a much greater extent. For example, the price of gold mine shares has risen two to three times as much as gold itself over many years. It’s similar to a leverage effect in stock prices.
4. Bad News May Be Already Priced In
There are many concerns about environmental problems, climate change, ESG, fueled by policymakers, politicians around the oil industry. But all this bad news is mostly already well-known, may be priced in for some time. In an oversold sector, even terrible news may push stock prices up.
5. ESG Scores Are Getting Better
The EGS-scores of oil majors is very low, so low. They can only be better. The companies need to work and also will make efforts on more environment-friendly techniques. They are obliged by regulators and shareholders to do so. With these efforts, the ESG scores may improve in the long run, and the stocks may become more attractive for more investors.
6. Is Oil Here To Stay?
Oil stays with us for another 15-20, perhaps even more years. The renewable energy revolution may be unstoppable, but the process is slow. Traditional energy production may stay an excellent business for 1-2 decades.
7. Money Printing, Inflation and Commodity Supercycle
Commodities are moving in a strong uptrend now. The DJ Commodity Index surged 64 percent in the last 12 months, and the Bloomberg Commodity Index (TR), 48 percent. (More than the Nasdaq Composite.)
By a report by Bloomberg, the most popular crude option in the market is now one which provides gains if WTI crude surges over $100. Many authors mention the possibility of a commodity supercycle fueled by post-pandemic economic recovery, increasing inflation, government spending programs, and low interest rates. All this, with an economic boom, may push commodity prices higher–also crude. And energy companies earn more.
8. An Energy Stock ETF Is Much Better Than Crude
Energy Stock ETFs performed much better in the last five years than Crude Oil ETFs or crude futures themselves. While companies are earning and paying a dividend, commodity holders must pay for the storage and other expenses. (The price of crude oil moves often in contango that leaves long positions /buyers/ in disadvantage, see: Crude Oil Buy Is an Extremely Dangerous Play)
If the crude oil price doesn’t change much, shareholders of energy firms are earning, holders of crude are paying expenses. It is better to hold energy stocks or ETFs in the long term than crude (ETFs like USO, futures, or other derivatives). Look at the chart:
9. Stong Incomes from Natural Gas Business
Natural gas is also an essential product in the portfolio of energy companies. Electric cars aren’t changing the way we heat–and cool down, air condition–our houses. This business may survive longer than the oil business–and companies are investing in it.
ExxonMobil, Chevron, Royal Dutch Shell, Total, and Bp. These supermajors saw gas rise from 39% of their combined hydrocarbon output in 2007 to 44% in 2019. Proponents see gas as the “bridge fuel” to a greener world. (The Economist.)
10. Other Lucrative Businesses
Oil companies have other lucrative businesses like the operation of gas stations and the shops in them. They can operate electric charging stations in the future. They also provide the raw material for the chemistry industry. Although plastics consumption may also decrease, part of the demand may stay in the long run.
11. A Lottery Ticket: A Possible Crude Price Explosion
Investments in new oil fields are declining, and professionals talk about severe under-investment in the segment. Even an oil shortage is possible in the following years, causing extreme prices. Thanks to a price explosion, companies could earn a lot.
There is no free lunch in the energy business, and the current shift to renewables will ensure that petroleum becomes scarcer and more expensive. All of this will work to tighten supplies and drive costs up for energy consumers for the foreseeable future. (Business Insider)
12. Let’s Capture Carbon
The oil industry has technologies useful in the CO2-neutralization process (carbon capture), planned by some scientists to stop global warming. For example, the absorbed CO2 could be injected into oil fields, which can be lucrative in the future.
Carbon capture and storage (CCS) or carbon capture and sequestration is the process of capturing emitted carbon dioxide, transporting it to a storage site, and depositing it where it will not enter the atmosphere. (Wikipedia)
Risks of Energy Stock ETFs
This list is much shorter, but that doesn’t mean I want to underestimate the risks involved in this industry. It can be disrupted in the future, may disappear entirely in a decade if technology advances faster than it seems to go on today. Because:
- Electric vehicles are threatening the industry in the long term.
- Investors may punish the sector for ESG concerns, leaving stock prices low for years or even a decade or so.
- Fulfilling ESG requirements is an extensive and costly process, requires inversions. It may impact the earnings of the sector heavily.
- Big Oil may be strictly regulated and pushed back. While smaller energy companies, unregulated OPEC-countries benefit more of the remaining crude business.
An European Energy Stock ETF
In Europe, many US ETFs are not available (because of the Mifid 2 rules). But the EuropeanXDW0 (MSCI World Energy UCITS ETF 1C) has a similar purpose and composition to the others mentioned above. It is tracking the MSCI World Energy TRN Index.
The fund has no dividend yield because it reinvests the payouts. But the underlying index had a dividend yield of 4.79 percent p. a. on March 31, 2021.
Is an Energy Stock ETF Only Remain of the Past?
Typewriter manufacturer companies are the symbol of the extinction of whole industries, the disruption by new technologies. Many investors prefer the disruptive over the disrupted and bought mainly technology stocks (growth) in the last years. In comparison, value sectors were underweighted and seem to be so until today.
Typewriter Or Tobacco?
Tobacco is, on the contrary, an example of how an industry can survive despite brutal headwinds, regulatory measures, and changes in customer behavior. Its significant players suffered in the stock exchange earlier but today pay high dividends and may be a good investment. At least for investors who set moral concerns aside.
Conclusion: High Risks, With Good Chances of High Rewards
I think the risk-reward rate seems fair in the energy stock ETFs, which are still attractive. (I keep holding the XDW0 ETF myself.)
Nasdaq.com, ETFdb.com, TotalEnergies
VIX ETF – How To Make 10 Percent Monthly, Or Die
I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.
At the time of writing: I’m long in gold miner stocks, silver, platinum, copper, multinational energy companies, Anglo American, and various cryptocurrencies. Short in the VStoxx and the VIX index.