Tag Archives: etf-hub

Oil ETFs Slide Again: More Pain In Store?

After smooth trading in May and June, oil resumed its decline and trapped in the nastiest downward spiral in July joining the broader selloff in commodities amid the growing global glut and the China slowdown. In fact, U.S. crude oil lost nearly 21% in July, which was the worst month since October 2008. The rout worsened in the first session of August with crude plunging as much as 5% on Monday to around $45.17 per barrel. On the other hand, Brent oil dropped to below $50 per barrel for the first time since January. Inside the Recent Slump The brutal trading on Monday can be attributed to the increase in the number of rig counts, weak China manufacturing data, and downbeat U.S. economic data on manufacturing and construction spending that suggests tepid oil demand growth around the world. China manufacturing activity unexpectedly fell to a two-year low in July, adding to worries on the world’s second-largest economy. Meanwhile, U.S. manufacturing also slipped in July and consumer spending advanced at its slowest pace in four months in June, indicating that the world’s largest economy is losing momentum yet again. Coming to the supply side, the Organization of Petroleum Exporting Countries (OPEC) is pumping up maximum oil in the recent past buoyed up by higher output from Iraq and Saudi Arabia. It is currently producing about 32 million barrels a day against its target of 30 million barrels a day. Additionally, Iran, the world’s fourth-largest reserve holder with 158 billion barrels of crude oil, is gearing up to boost its production immediately after sanctions are lifted, which is expected in late November. As per Iran’s oil minister, Bijan Namdar Zanganeh, production will likely increase by 500,000 barrels a day within a week after relaxation in sanctions and by 1 million barrels a day within a month. Further, oil production in the U.S. has been on the rise and is hovering around its record level. ETF Impact Terrible trading has been felt in the ETF world as well, sending oil ETFs tracking the futures contract in deep red from a one-month look. In particular, the iPath S&P GSCI Crude Oil Index ETN (NYSEARCA: OIL ) stole the show tumbling 19.6%, followed by over 17% declines in the United States Oil Fund (NYSEARCA: USO ) ), the iPath Pure Beta Crude Oil ETN (NYSEARCA: OLEM ) and the United States Brent Oil Fund (NYSEARCA: BNO ) . Two of the most popular leveraged oil ETFs – the ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA: UCO ) and the VelocityShares 3x Long Crude Oil ETN (NYSEARCA: UWTI ) – dropped 46.4% and 33%, respectively, in the same time frame. The former provides twice the return of the daily performance of the Bloomberg WTI Crude Oil Subindex while the latter delivers thrice the returns of the S&P GSCI Crude Oil Index Excess Return. Both indices consist of WTI crude oil futures contracts. What Lies Ahead? With deteriorating demand/supply dynamics, the prospect of an oil price rebound in the second half looks faded. In fact, there is a clear sign that oil price might revisit its previous low of the year, pushing the oil ETFs further down. This is especially true as speculators betting on rising oil prices have fallen sharply in recent weeks. Hedge funds reduced their net-long position in WTI to the lowest level in five years for the week ended July 28, according to the U.S. Commodity Futures Trading Commission data. Further, money managers also cut their bullish bets on Brent by 37,527 contracts for the same week, representing the biggest decline since July 2014, as per data from the ICE Futures Europe exchange. That being said, inverse ETFs have been on the tear over the past one month with the VelocityShares 3x Inverse Crude ETN (NYSEARCA: DWTI ) , the ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) and the PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) gaining 68.4%, 42.2% and 30.9%, respectively. As a result, investors bearish on oil could make a short-term play on these ETFs for big gains in a short span, especially if the “trend remains a friend” in this corner of the investing world. Link to the original article on Zacks.com

Low P/E Stock Of The Day No. 5: Calpine Corporation

Summary The company is trading at TTM P/E of 8.8x. Environmentally operations mean that the company will face less regulatory issues. Increase in EPS is the result of favorable macro-conditions, increasing the Commodity Margin. In this series I will select a low P/E stock to analyze. I define low P/E as anywhere from 5x to 10x, as any lower and we may be looking at special situations. Calpine Corporation (NYSE: CPN ) is a U.S. power producer. The company primarily operates natural gas-fired and geothermal power plants and sells wholesale energy to corporate customers. Natural gas-fired generators use gas as fuel to power turbines while geothermal powered generators harness energy from hot water below Earth’s surface. At the end of 2014, the company had 88 plants in total. After beating its second quarter earnings, share shot up 10%. But the company is still trading at a TTM P/E ratio of 8.8x, well within our selection criteria. Let’s explore further and see if there may be an opportunity. The Business While the company generates power from renewable sources (geothermal) as well as fossil fuel (natural gas), the two methods share the common characteristic of being environmentally friendly. How geothermal energy is good for the environment is self-explanatory, but it may surprise you that natural gas is actually one of the cleanest fossil fuel options for electricity generation, emissions are virtually zero. Why is this important? In an increasingly stringent regulatory environment, non-environmentally friendly power generating methods (e.g. coal) are facing some tough challenges . This means that Calpine will not face similar legal issues in the future, decreasing the risk for shareholders. Making Sense Of The Numbers As evident by the above chart, revenue has been increasing since FYE 2012. However, this is not attributed to a larger turnover (i.e. electricity generation), as power generated did not vary much from year to year. The company generated 112 MMWh of power in 2012, 102 MMWh in 2013, and 100 MMWh in 2014. As you can see, the amount of power generated actually decreased, yet revenue still went up. This is possible because the price that the company gets per MWh fluctuates. This is called the Commodity Margin and it is impacted by a plethora of factors such as price of natural gas, economic growth, and environmental regulation. In a sense, this risk can be compared to the commodity risk faced by all energy producing companies. For the last couple of years, the company has benefited from favorable macro-factors (e.g. falling natural gas prices) that allowed it to increase its Commodity Margin. What does this mean? This means that earnings can be quite volatile. From the chart below we can see that both the operating margin and the EPS swings wildly from year to year. Conclusion The company does not face imminent challenges from regulators and should be around for a long time, but its financial results do not share the same outlook. The surge in EPS that the company experienced over the past couple of years can be largely attributed to extrinsic factors. This is the risk that you must be willing to bear if you want to invest in a wholesale power company. While favorable macro-environment factors will benefit the company (as they have done so for the past three years), the company cannot generate predictable earnings in the future, meaning that the low P/E ratio today does not necessarily translate to a cheap stock. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.