PXI Invesco ETF Trust Invesco Dorsey Wright Energy Momentum ETF

The energy sector has been performing remarkably well this year, especially following the geopolitical tensions in Russia, and is clearly outpacing the broad market indices. Further, the current demand/supply dynamics suggest higher oil prices, and in turn soaring prices for energy stocks and the related ETFs.

Russia Threatens Oil Supply

The situation in Russia is getting worse as the Ukrainian regime calls for military buildup against Russia on one hand, and the U.S. and European Union are looking for more tough sanctions against the country on the other if the crisis escalates further. This is especially true given that at least three pro-Russian militants were killed in the gun battle near the volatile eastern Ukrainian town of Slavyansk on Sunday (read: 3 Commodity ETFs Surging on Russia Sanctions).

Since Russia is a huge supplier of both natural gas and oil, Western Europe and other markets are heavily dependent on Russian production to fuel their economies. If the crisis escalates or European Union hits Russia with more sanctions then the latter could keep European markets away from its vast oil and natural gas supplies. This will result in higher oil prices, pushing Western Europe in search of other markets to meet their energy needs.

Encouraging Demand/Supply Trends

Though oil production in the U.S., the largest oil consumer, reached its highest levels in 24 years thanks to new hydraulic fracturing (fracking) methods and a boom in unconventional oil production, output in other countries is showing signs of waning. The civil unrest and operational issues in Libya and Iraq, reduced supplies in Saudi Arabia, and repairs and maintenance in Kazakhstan oil fields would take a toll on total oil supply going forward in addition to Russia’s reduced output.

As a result, non-OPEC supply is expected to fall by 0.25 million barrels per day this year to 29.8 million barrels per day, as per the International Energy Agency (IEA). The agency also expects global demand to rise a modest 1.5% to 92.7 million barrels per day this year. Most of the demand is expected to come from volatile emerging markets.

Moreover, the oil and energy industry currently has a Zacks Industry Rank in the top 38%, suggesting a bullish outlook for the broad sector. So the overall sector is looking quite promising at present, especially given some of the weakness in many of the high-flying names in other key sectors such as biotech and technology (read: The Momentum Stock Crash Puts These ETFs in Focus).

Fortunately, there are a few top ranked picks in this corner of the market, and we have described some below. Any of these could enjoy smooth trading and lead the market higher in Q2:  

Top Energy ETFs

iShares U.S. Oil & Gas Exploration & Production ETF (IEO)

This ETF tracks the Dow Jones U.S. Select Oil Exploration & Production Index and holds 77 securities in its basket. The fund has $468.6 million in its AUM and trades in good volume of nearly 111,000 shares per day. It charges 46 bps in annual fees and expenses (read: Energy Exploration ETFs: A Bright Spot in The Choppy Market).

The product is heavily concentrated on the top firm – ConocoPhillips (COP) – at 12.9% while EOG Resources (EOG), Anadarko Petroleum (APC) and Phillips 66 (PSX) round off to the next three spots with combined 21.5% of assets. In terms of industrial exposure, exploration and production takes the top position at 70.60% while integrated oil & gas takes the remainder.

The fund added about 10% so far this year and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘High’ risk outlook.

PowerShares DWA Energy Momentum Portfolio (PXI)

This fund provides exposure to 34 energy stocks having positive relative strength (momentum) characteristics by tracking the DWA Energy Technical Leaders Index. It has accumulated $203 million in its asset base and trades in small volume of about 24,000 shares per day. Expense ratio came in at 0.66%.

The ETF is somewhat concentrated on the top 10 holdings at over 44% with the largest allocation going to Cheniere Energy (LNG) and Continental Resources (CLR). From a sector look, three-fourths of the portfolio is tilted toward oil, gas & consumable fuels while energy, equipment and services make up for the remainder.

PXI is up 8.6% in the year-to-date time frame and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook (see: all the energy ETFs here).

Top Energy Stocks:

Sprague Resources LP (SRLP)

Investors looking for a concentrated play on a particular company in the energy industry could consider SRLP. This company is one of the largest independent suppliers of energy and materials handling services in the Northeast. Its products include home heating oil, diesel fuels, residual fuels, gasoline and natural gas.

SRLP has seen solid earnings estimate revisions for both the current quarter and the current year over the past month as about more than 50% of the analysts revised their estimates upward. In fact, over the past one month, the consensus estimate for the current quarter has risen from 4 cents per share to 6 cents per share while the current year estimates climbed from $1.47 per share to $1.61 per share. This suggests that a bright future is ahead for this company.

Sprague currently has a Zacks Rank #2 (Buy), meaning it could be primed for more growth in the months ahead.

Targa Resources Corp. (TRGP)

For a slightly different play on the energy segment, investors should consider TRGP. This company primarily supplies midstream natural gas and natural gas liquid services in the United States.

TRGP has also seen rising earnings estimates with about 40% of the analysts increasing earnings estimate for the current quarter and the current year over the past 30 days. The consensus estimate for the current quarter and current year stood at 61 cents and $2.71 per share, respectively (read: 3 Oil ETFs Stand Out on Russian Tensions).

This is up from 56 cents for the current quarter and $2.25 per share for the current year over the last 30 days. Further, the estimates represent a whopping year-over-year growth of 69.4% and 74.7% for this quarter and the year, respectively. This suggests the company’s incredible potential to grow in the coming months. Further, Targa currently has a Zacks Rank #2 (Buy), underscoring the company’s solid position.

Bottom Line

Markets have been choppy of late as soft global economic fundamentals, stretched valuations and earnings warnings dampened investor mood. In light of this, it might be time to focus on a sector that is seeing rising earnings estimates, and is well positioned to benefit from the current geopolitical pressures (read: 3 Low Risk ETFs for Market Turmoil).

Energy companies certainly poised to benefit from this scenario and any of the aforementioned picks could be solid choices to play this trend given the uncertain market environment.

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ISHARS-US O&G (IEO): ETF Research Reports
 
PWRSH-DW EGY MO (PXI): ETF Research Reports
 
SPRAGUE RESRCS (SRLP): Free Stock Analysis Report
 
TARGA RESOURCES (TRGP): Free Stock Analysis Report
 
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