While economic weakness and a strong dollar have kept oil prices
depressed for the time being, many are still long-term bulls on the
vital commodity. The world population grows at a rate of roughly 1%
per year while surging economic growth in the BRIC bloc-- as well
as other emerging nations-- looks to keep pressure on oil prices
well into the future.
Beyond this, many of the world’s key oil fields are
reaching or have gone past their peak production levels, suggesting
that many of the top spots for the commodity will see declining
rates of output in the near future. This trend has already begun to
take place in Saudi Arabia’s massive Ghawar Field, Mexico’s
Cantarell Field, and Alaska’s Prudhoe Bay, forcing many major oil
companies to look elsewhere for large amounts of recoverable
supplies (see Two Energy ETFs Holding Their Ground).
While the situation may seem dire in many of these
important oil markets, North American oil production is actually on
the rise as of late thanks to new technologies in the space.
According to representatives from the DOE, domestic production is
up 15% year-over-year pushing the total output to the highest level
in more than a decade.
This has largely been the result of greater use of
fracking technologies and better processes to unlock oil from oil
sands and shale. North America has massive quantities of both of
these types of oil and with prices significantly elevated from a
decade ago and new technology hitting the market, these once
irrecoverable oil deposits are now capable of hitting the market
(see 11 Great Dividend ETFs).
In fact, between shale and sands, total reserves
could approach the equivalent of several trillion barrels of oil,
enough to completely alter the landscape in terms of hydrocarbon
production. Conoco Phillips’ CEO said as much during a recent OPEC
conference, stating that North America could become self sufficient
in oil by 2025.
Obviously if we can ever see this happen or even
oil production reach anywhere close to this figure, a greater focus
on unconventional oil sources will have to be taken. Investment in
the space will need to increase and technology will also have to
improve from its current levels, but even the fact that such a
prominent CEO can put this in the realm of possibilities is
certainly promising.
While playing the beginning stages of this trend is
certainly possible via any number of individual stocks, this
approach could produce high levels of volatility and miss out on
some of the big winners as well. Instead, many investors may be
better served by taking an ETF approach in the market instead, in
order to get wide exposure to the space across a number of
different firms (see Three ETFs for The Energy Efficiency
Boom).
Luckily for investors, the ETF market has been
growing by leaps and bounds over the past few years and a number of
products exist that hone in on the space. In particular, we believe
that the following three ETFs could be big winners from the coming
energy revolution in the North American market:
Market Vectors Unconventional Oil & Gas ETF
(FRAK)
FRAK tracks the Market Vectors Unconventional Oil
& Gas Index, which is a rules based benchmark designed to track
the overall performance of the unconventional oil market. The firm
has this include firms that are engaged in any of the following
businesses; coalbed methane, coal seam gas, shale oil, shale gas,
tight natural gas, tight oil and tight sands.
This produces a fund that holds about 45 companies
in its basket while the vast majority is in exploration and
production companies. This sector accounts for nearly 80% of the
total, leaving just a fraction for integrated oil companies,
pipelines, and the coal sector (read Play An Oil Bull with These
Three Emerging Market ETFs).
Top individual names in this market cap weighted
fund include Anadarko, Occidential, and Canadian Natural Resources.
Overall, the entire portfolio is in North American firms with a
73/27 split that favors the U.S. over Canada.
Volume is somewhat light in this fund that just
debuted in February but the product has already accumulated a
decent amount of assets in the short time frame. However, the fees
are a few basis points higher than others in the category at 54bps
and dividends could be lighter thanks to a heavy focus on the
exploration and production segment.
Sustainable North American Oil Sands ETF (SNDS)
This relatively new product looks to track the most
liquid U.S. and Canadian firms that are investing in Canada’s oil
sands market. This includes companies that are engaged in any of
the following aspects of the market; oil exploration, production,
refinement, marketing, storage, transportation and services.
Currently, the ETF holds 32 securities in its
basket and it has a heavy focus on integrated oil and
exploration/production firms. Beyond these securities, pipeline
& distribution stocks, as well as engineering, trading, and
equipment, round out the rest of the product.
Investors should also note that the fund is almost
entirely focused on large cap blend stocks with some giant caps
making their way into the product such as ConocoPhillips, and
Chevron. However, a number of more targeted small caps also find
their way into the product including Nexen and Oil States
International.
In terms of volume, SNDS still trades at a light
level, suggesting that bid ask spreads may be quite wide. However,
expenses are reasonable at 50 basis points a year and the yield is
likely to be pretty solid thanks to the inclusion of a number of
large cap oil stocks and big dividend paying pipeline securities
(also read Inside The Forgotten Energy ETFs).
Guggenheim Canadian Energy Income ETF (ENY)
This ETF takes a slightly different approach to the
sector, offering up a mix between royalty trusts and oil sands
producers by tracking the Sustainable Canadian Energy Income Index.
This looks to combine the highest yielding Canadian energy
securities with the most highly focused oil sands producers with
exposure based on crude oil prices.
When crude oil is determined to be in a bull
market, the product has a 70% weighting to oil sands and puts just
30% in the royalty trust space. Meanwhile, when oil is in a bear
phase-- when the current quarter’s price is below the four quarter
moving average price-- the focus shifts towards high yielding
securities in a 70%/30% split.
At time of writing, the fund is skewed towards
exploration and production companies as these account for nearly
60% of assets while integrated firms make up another 26%. Top
individual weightings go to Imperial Oil, Suncor Energy, and
Canadian Oil Sands, all of which make up about 7% of total assets
each.
It should also be noted that pretty much the entire
fund is denominated in Canadian dollars so there is some foreign
currency risk as well. However, this could make it more of a pure
play on the Canadian oil boom, something to consider if investors
are looking for a broad play on the North American oil market or
just a bet on the Alberta oil sands and related areas.
Thanks to the more involved rebalancing strategy,
this product is the most expensive on the list, coming in at 70
basis points a year in fees. However, it is also the most popular
with $91 million in AUM and solid volumes that can help keep the
bid ask ratio at a decent level.
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Author is long ENY.
GUGG-CDN ENERGY (ENY): ETF Research Reports
GUGG-CDN ENERGY (ENY): ETF Research Reports
GUGG-CDN ENERGY (ENY): ETF Research Reports
GUGG-CDN ENERGY (ENY): ETF Research Reports
GUGG-CDN ENERGY (ENY): ETF Research Reports
MKT VEC-UNC O&G (FRAK): ETF Research Reports
MKT VEC-UNC O&G (FRAK): ETF Research Reports
MKT VEC-UNC O&G (FRAK): ETF Research Reports
MKT VEC-UNC O&G (FRAK): ETF Research Reports
MKT VEC-UNC O&G (FRAK): ETF Research Reports
SUST-NA OIL SND (SNDS): ETF Research Reports
SUST-NA OIL SND (SNDS): ETF Research Reports
SUST-NA OIL SND (SNDS): ETF Research Reports
SUST-NA OIL SND (SNDS): ETF Research Reports
SUST-NA OIL SND (SNDS): ETF Research Reports
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