Energy stocks are locked in what is becoming a lengthy bear market — as evidenced by some of the pain in the market’s largest, most well-known energy companies and exchange-traded funds. For example, the Energy Select Sector SPDR (ETF) (XLE), the largest ETF holding energy stocks by assets, was the worst performer of the nine SPDR sector ETFs in 2014.
Actually, XLE was the only one of the nine SPDRs that finished 2014 in the red.
And while several others notched losses in 2015, XLE was by the worst performer again with a loss of 21.5%, or approximately two-and-a-half times the ETF’s 2014 loss of 8.7%.
Exxon Mobil (XOM) and Chevron (CVX) — the two largest U.S. energy stocks and XLE’s top two holdings — were two of the worst-performing members of the Dow Jones Industrial Average in 2015.
With oil prices residing at 12-year lows and more downside being the obvious path of least resistance (at least in the near-term), energy stocks are struggling to start 2016. Just a few weeks into the new year, XLE is down almost 14%, making it the worst performer among the nine SPDRs.
Knowing that, your logical reaction might be to ditch energy stocks altogether while waiting for a legitimate rebound in oil prices.
However, not all energy stocks are likely to be relegated to laggard status this year. At the very least, some energy stocks will be notably less bad than the sector at large — and some of those names reside in the Market Vectors Oil Refiners ETF (CRAK).
Fight Back With CRAK
Among energy ETFs, the Market Vectors Oil Refiners ETF is a new kid on the block, having debuted in August as the first ETF dedicated to refiners. Compared to other energy stocks, such as oil services and exploration and production names, refiners are far less sensitive to lower oil prices. In fact, lower oil prices are actually seen as beneficial to refiners because those lower prices bolster spreads’ for refiners.
The proof is in the pudding. CRAK has lost 5.5% since coming to market, and while that is nothing to write home about, the fund’s loss is less than a third of the tumble XLE has taken over the same period.
CRAK follows the Market Vectors Global Oil Refiners Index, “which is a rules-based, modified capitalization weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining. Products of oil refiners include gasoline, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to Market Vectors.
CRAK is home to 26 stocks, with familiar names Valero (VLO), Phillips 66 (PSX) and Tesoro (TSO) combining for more than 21% of the ETF’s weight.
Phillips 66, CRAK’s second-largest holding behind Valero, is a holding of Warren Buffett’s Berkshire Hathaway (BRK.B). In fact, Berkshire has recently been adding to its Phillips 66 stake and now owns nearly 13% of the company.
“Analysts’ estimates suggest that the ten large-cap refiners may return 24% on average in the next 12 months. Frontline refineries Phillips 66, Valero Energy, Marathon Petroleum (MPC), and Tesoro could rise by 18%, 12%, 31%, and 20%, respectively, from their current levels,” reports Market Realist.
Those stocks combine for over 27% of CRAK’s weight, indicating that if those bullish forecasts are realized, the ETF offers potential upside in what is still a trying environment for energy stocks.
And some analysts are bullish on refiners for this year. In a note out last month, JPMorgan said:
“A few counterpoints … (1) our refined products supply/demand model suggests that gasoline margins should remain quite strong in 2016, even if demand is only flat, so we feel good about the product margin remaining favorable, even if it is only gasoline; (2) medium and heavy crude discounts are favorable and production of these crudes is likely to keep increasing in 2016-17, which should help those refiners with the access and capability to process (e.g., Gulf Coast),”
CRAK charges 0.59% per year, or $59 for every $10,000 invested.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
