PXE: An Outperforming Energy Exploration And Production ETF
Summary Energy, particular exploration and production stocks, have slid over the past year. PXE has thoroughly crushed its competitor XOP and has also outperformed XLE over the past five years. PXE contains a number of refining companies as top holdings which might help it weather this period of low oil prices. Introduction To state that energy-related sectors have done poorly recently would be an understatement. Since the recent high reached on Jun 23., 2014, the benchmark Energy Select Sector SPDR ETF (NYSEARCA: XLE ) has fallen by a good -34.0%. The JPMorgan Alerian MLP Index ETN (NYSEARCA: AMJ ), a basket of midstream MLPs, has performed slightly worse, at -43.0%. However, the worst-performing energy-related stock class over this time period has undoubtedly been those whose main business is focused on the exploration and production (E&P) of oil and gas, with the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) falling by a whopping -58.0% since mid-June last year. This price action occurred over a time period in which the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) actually rose by 9.69%. Obviously, the woes in the energy sector have been due to the collapse in oil prices that transpired over the past year. Moreover, it is not difficult to understand why XOP has performed so much worse than the other two energy funds, XLE and AMLP. The two top holdings of XLE, Exxon Mobil (NYSE: XOM ) and Chevron (NYSE: CVX ), both have significant downstream businesses that could, in some circumstances, actually benefit from lower oil prices, and they also possess exceptional balance sheets that could aid them through this difficult time. Meanwhile, the midstream MLPs of AMJ, the largest of which are Enterprise Products Partners (NYSE: EPD ) and Energy Transfer Partners (NYSE: ETP ), are considered to be relatively less impacted by price of the commodity itself as their profit is mainly derived from the fee-based transport and distribution of fuels. On the other hand, the fortunes of the E&P, also known as upstream, companies in XOP are more or less directly tied to the price of crude oil. So is XOP a good buy right now? Clearly, if you believe that oil prices will remain low, then XOP would be an ETF to avoid. On the other hand, given that E&P companies have been among the most beaten-up stocks in the energy sector, any reversal in crude oil prices could send these XOP soaring like a compressed spring. What this article intends to do is actually to introduce an ETF that is related to XOP, but has historically performed much better. Introducing the PowerShares Dynamic Energy Exploration & Production Portfolio ETF (NYSEARCA: PXE ) PXE does not appear to be a well-known ETF on Seeking Alpha. Only 784 Seeking Alpha users have PXE in their portfolio, compared to 5,597 for XOP. The last focus article on PXE was in Dec. 2014. However, the lack of following for PXE is undeserved. Despite the recent turmoil in the energy sector, the five-year total return performance for PXE is still positive at +23.47%, absolutely crushing XOP at -28.2%. Notably, PXE still returned significantly greater than XLE (+8.42%). PXE Total Return Price data by YCharts Some funds outperform in bull markets because they take greater amounts of risk, and thus these same funds will underperform on the downside as well. Is this true for PXE? As can be seen from the chart below, its total return since the XLE peak on Jun 23rd. 2014 (-35.8%), while negative, is still superior to that of XOP (-58.0%) and AMJ (-43.0%) and only slightly worse than that of XLE (-34.0%). The investment mandate of PXE is explained on the fund website : The PowerShares Dynamic Energy Exploration & Production Portfolio (NASDAQ: FUND ) is based on the Dynamic Energy Exploration & Production IntellidexSM Index (Intellidex Index). The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Intellidex Index thoroughly evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value. The Underlying Intellidex Index is composed of stocks of 30 U.S. companies involved in the exploration and production of natural resources used to produce energy. These companies are engaged principally in exploration, extraction and production of crude oil and natural gas from land-based or offshore wells. These companies include petroleum refineries that process the crude oil into finished products, such as gasoline and automotive lubricants, and companies involved in gathering and processing natural gas, and manufacturing natural gas liquid. The Fund is rebalanced and reconstituted quarterly in February, May, August and November. Further information regarding the proprietary Intellidex methodology can be found here . Fund statistics The following table shows some of the pertinent fund details for PXE, XOP and XLE. Data are from Morningstar unless otherwise noted. PXE XOP XLE Yield 1.95% 1.97% 2.92% Expense ratio 0.64% 0.35% 0.14% Inception Oct. 2005 Jun. 2006 Dec. 1998 AUM $106M $1.66B $11.73B Avg. Volume 36.5K 10.8M 19.7M Morningstar rating **** ** ***** No. holdings 30 63 40 Annual turnover 140% 44% 5% We can see from the table above that PXE is by far the smallest fund, with only $106M in assets. This makes is less than one-tenth of the size of XOP and less than one-hundredth of the size of XLE. It’s liquidity of 36.5K is also far less than XOP and XLE, although it should be still be sufficient for small or medium investors. The final statistic that sticks out is that PXE has a much higher annual turnover of stocks at 140% than XOP at 44%, which in turn has a much higher annual turnover compared to XLE at only 5%. Holdings So why do I consider XOP to be PXE’s closest benchmark? Notwithstanding the fact that both ETFs have “Exploration & Production” in their names, ETF Research Center indicates that the two funds have 42% of their holdings by weight in common. Notably, 25 out of 30 of PXE’s constituents are also found in XOP. In contrast, PXE and XLE have only 27% overlap by weight, while XOP and XLE have 31% overlap. Thus, PXE and XOP are more similar to each other than either of them are to XLE. The top 10 holdings of PXE are shown in the table below. Company Ticker % Assets EOG Resources Inc (NYSE: EOG ) 5.28 Valero Energy Corp (NYSE: VLO ) 5.27 Phillips 66 (NYSE: PSX ) 5.23 Occidental Petroleum Corp (NYSE: OXY ) 5.13 Marathon Petroleum Corp (NYSE: MPC ) 5.11 Hess Corp (NYSE: HES ) 5.00 Apache Corp (NYSE: APA ) 4.98 Devon Energy Corp (NYSE: DVN ) 4.86 CVR Refining LP (NYSE: CVRR ) 2.93 Northern Tier Energy LP (NYSE: NTI ) 2.87 46.66 As can be seen from the table above, PXE runs a relatively concentrated portfolio, with 46.66% of its holdings in the Top 10. This compares to 19.35% for XOP and 63.41% for XLE, as depicted graphically below. Notably, the three of the top five holdings of PXE, namely MPC, VLO and PSX, are all heavily involved in the downstream refining segment, and whose fortunes are more closely associated with the refining crack spread rather than the price of crude oil itself. As can be seen from the chart below, these three stocks have actually posted positive price returns since the Jun. 23, 2014 peak for XLE. On the other hand, EOG and OXY have been obvious detractors of the fund. EOG Total Return Price data by YCharts Valuation and growth The table below shows various value and growth metrics for PXE, XOP and XLE. Data for all funds are from Morningstar (value metrics including dividend yield are forward looking). PXE XOP XLE Price/Earnings 10.39 16.77 19.07 Price/Book 0.89 0.89 1.42 Price/Sales 0.43 0.48 0.80 Price/Cash Flow 2.54 2.36 5.09 Dividend Yield % 4.26% 2.32% 3.45% Projected Earnings Growth % 10.33 8.62 9.98 Historical Earnings Growth % 13.48 17.56 3.04 Sales Growth % 3.34 5.34 2.82 Cash-flow Growth % 6.60 11.50 7.44 Book-value Growth % 5.48 7.71 6.06 While aggregate metrics for ETFs sometimes have to be taken with a grain of salt (for example, aggregate P/E calculations usually ignore stocks with negative earnings), a first glance reveals that PXE scores highly on its valuation and growth metrics compared to peers XOP and XLE. It has the lowest P/E, P/B (tied), P/S and highest dividend yield compared to the other two funds, and its P/CF is only slightly higher than XOP’s. In terms of growth metrics, all three funds have had healthy growth numbers over the past year (although this is likely to change as lower oil prices begin to drag), and while PXE has lower CF% and BV% growth than the other two funds, its other three growth metrics are comparable. Size In terms of size distribution, PXE is quite similar to XOP except that it has more large-cap stocks and fewer stocks in the other four size categories. Both PXE and XOP contain smaller-capitalization stocks compared to XLE. PXE XOP XLE Giant (%) 0 3.52 38.32 Large (%) 34.99 17.02 42.95 Mid (%) 26.78 32.33 17.71 Small (%) 30.19 33.44 1.02 Micro (%) 8.04 13.68 0 This data is also shown graphically below. Discussion and conclusion The impressive total return performance of PXE relative to its peers suggests that the Intellidex methodology has worked very well for this ETF. Given the Intellidex’s focus on factors including price momentum, earnings momentum, quality, management action, and value, PXE could easily be considered to be a “smart beta” fund, although its inception (in 2005) took place long before this marketing label became popular. The outperformance of PXE over XOP could be potentially attributed to several factors. First, by running a concentrated portfolio of 30 stocks (compared to 63 for XOP), PXE could avoid exposure to stocks that score less highly in its ranking model. On the other hand, XOP applies no filters other than market capitalization and liquidity for inclusion into the fund. Secondly, PXE applies a two-tier weighting system whereby 8 “large” stocks each receive 5% of the total fund weight and 22 “small” stocks each receive 2.73% of the total fund weight. In contrast, XOP basically run an equally-weighted portfolio. This is reflected in XOP’s greater tilt towards smaller-cap stocks compared to PXE (see data above). Given that large-cap energy stocks have generally performed better than small-cap stocks during this energy bear market, it stands to reason that XOP would suffer more than PXE during this time period, all other things being equal. However, the use of factor screening in conjunction with quarterly rebalancing means that PXE has a much higher annual turnover (140%) compared to XOP (44%). So is PXE a good investment right now? Without a crystal ball able to tell the future price of oil and gas, I cannot say with certainty. However, what this analysis does suggest is that if one were to choose an E&P-focused energy ETF, then PXE would be a better bet than XOP. Moreover, with 5 of the fund’s top 10 holdings currently invested in refining stocks (VLO, PSX, MPC, CVRR, NTI), which are less directly affected by commodity prices compared to E&P companies, PXE might weather the storm better than expected.