by Mark Salzinger, editor The Investor's ETF Report
Energy prices should find support from continued economic growth in 2012
and could spike higher if investors become even more skeptical of
political stability in the Middle East.
Looking out a few years,
other trends argue for higher stock prices in the U.S. For example,
energy discovery and exploitation of petroleum and natural gas reserves
in the U.S. is booming. Meanwhile, our favorite sector ETF for 2012 is
SPDR Select Energy (
XLE).
As long as current prices are sustained, unconventional reserves like
oil sands, shale gas and deepwater wells can be developed and extracted
profitably.
This is especially important for U.S. based producers, as much of North
America's remaining energy resources are locked in these kinds of ‘hard
to extract'geologies.
At the same time, higher energy prices
also benefit larger producers with lower-cost reserves, who stand to
earn that much more profit. This is of particular benefit to XLE, of
whose portfolio giants ExxonMobil and Chevron make up more than
one-third.
Energy companies are aided in achieving such high
profits by increasingly advanced seismic technology and extraction
equipment, which have helped keep costs down on both conventional and
unconventional reserves.
Nearly 20% of XLE is in oil equipment
and services, including industry leader Schlumberger. Equipment and
services stocks fell about 5% in 2011, a year in which the overall
energy sector gained nearly 3%, as demand from abroad was weak.
However,
burgeoning demand for new rigs and seismic testing in Western Canada
and North Dakota has helped sustain operating performance in the
industry, if not high stock prices.
XLE invests in the 44 energy
stocks included the S&P500. Its total return in 2011 (2.8%) was a
bit better than that of the S&P500 (up 1.9%), but its average
valuation on estimated 2012 earnings is lower (price/earnings ratio of
10.8, vs. 12.8 for the index), reflecting investor worries about the
sustainability of global growth.
We think this is an attractive entry point, considering prospects for increased global energy demand this year and beyond.