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Energy Mega-Caps: A Shelter in the Storm

A focus on the big and boring has paid dividends — literally


The energy sector has been a nightmare for investors so far this year, but you could hardly tell by looking at the integrated mega-cap names.

From its Feb. 24 peak through Friday’s close, the Select Sector Energy SPDR (NYSE:XLE) was off 16%, while the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) had cratered 24%. But during that same time, the global majors — while in the red on an absolute basis — have held up much better in relative terms:

  • Exxon Mobil (NYSE:XOM): -5.34%
  • Chevron (NYSE:CVX): -7.09%
  • ConocoPhillips (NYSE:COP): -6.58%

This helps illustrate a characteristic of these stocks that often is overlooked. Even though they generally are seen as being a staid, boring way to invest in energy, they actually have performed very well over time because of their ability to hold up through down markets.

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Take a look at the performance of the three U.S. giants compared to Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSE:IEO). Although this is a smaller ETF, it also represents a pure play on speculative drilling stocks because it holds no positions in the large integrated names. There have been some periods of substantial outperformance for IEO, such as mid-2008, but overall, investors did not receive any excess returns for taking on more risk. In fact, they came out behind.

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The equipment and services sector tells a similar story. Using the iShares Dow Jones U.S. Oil Equipment & Services Index Fund (NYSE:IEZ) as a proxy, the three majors have all outperformed this sector in the trailing six-year period.

These charts indicate that investors who are looking for longer-term opportunities in the energy sector might want to adopt the mantra “boring is better.”

The counterargument to this is that the six-year period shown above has been peppered with crises, from our own financial meltdown in 2008 to the three Europe-related downturns in 2010-12. This might be true, but there also is no indication that world governments are going to get their act together anytime soon. In an environment in which crises are much more common — with the resulting demand shocks for oil — the conservative approach can continue to work.

The second factor these three stocks have working in their favor is dividends. As of Friday, the respective 12-month forward yields for Exxon, Chevron, and Conoco were 2.8%, 3.6% and 4.9%. That’s a plus in its own right, of course, because it leaves an investor far ahead of the typical E&P or equipment name. But these yields have an additional benefit that isn’t as obvious: Since they fall into the category of  “dividend stocks,” they have the incremental buying support from the growing number of investors moving into this space.

Finally, it’s possible to make the case that these names could provide investors with some beta in a rally because of their favorable technical position. While all three are some distance from their breakout points, they also have printed nice cup-and-handle formations in the past three years. As a result, it’s entirely possible that the majors are in a position to deliver competitive performance in a rally, and not just in down markets.

The bottom line: Exxon, Chevron and Conoco aren’t as exciting as the energy sector’s more speculative plays, but their ability to hold up through volatility has made them one of the best long-term bets in the space.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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