XOP, FRAK, and PSCE are potential winners from Iran conflict
The oil sector has been mixed today as investors weigh the likely consequences of war with Iran. On the one hand, oil prices are way up, which should be good for energy. On the other hand, a lot of the big oil companies have operations in Iran and Iraq that could be disrupted by military conflict.
So which companies might benefit from rising oil prices without so much exposure to the Middle East? First of all, domestic production companies like shale and offshore drillers. Second, clean energy companies. And third, oil and gas exploration companies. It's tempting to go with a clean energy ETF, but those are trading at a relatively high P/E right now and don't pay much in the way of dividends.
Instead, I have three ETF suggestions:
1) XOP, an oil and gas exploration ETF. These trades at an extreme discount right now, with a P/E below 5 and a price-to-book ratio of 0.62. That price-to-book ratio means that that you're paying way less for these companies than their assets are worth. If they closed up shop tomorrow and sold off their assets, you'd actually *make* money on that. Plus it pays a 1.5% dividend.
2) FRAK, an "unconventional" oil and gas ETF with a lot of shale companies. The P/E and P/B are higher than XOP, but still attractive at 8.44 and 0.98. The dividend is about the same at 1.5%.
3) PSCE, a small- and micro-cap energy ETF, with a P/E and P/B slightly lower than XOP, at 4.36 and 0.51. This one has actually been the biggest winner today, with a gain of 2.3% vs. about 1.4% in the other two ETFs. However, the dividend distribution is quite a bit lower, at about 0.4%.
Perhaps even better than an ETF would be to look at the top holdings of each of these funds and see which have reacted best to the news, and which individual companies have good dividends, valuation, and execution.
So which companies might benefit from rising oil prices without so much exposure to the Middle East? First of all, domestic production companies like shale and offshore drillers. Second, clean energy companies. And third, oil and gas exploration companies. It's tempting to go with a clean energy ETF, but those are trading at a relatively high P/E right now and don't pay much in the way of dividends.
Instead, I have three ETF suggestions:
1) XOP, an oil and gas exploration ETF. These trades at an extreme discount right now, with a P/E below 5 and a price-to-book ratio of 0.62. That price-to-book ratio means that that you're paying way less for these companies than their assets are worth. If they closed up shop tomorrow and sold off their assets, you'd actually *make* money on that. Plus it pays a 1.5% dividend.
2) FRAK, an "unconventional" oil and gas ETF with a lot of shale companies. The P/E and P/B are higher than XOP, but still attractive at 8.44 and 0.98. The dividend is about the same at 1.5%.
3) PSCE, a small- and micro-cap energy ETF, with a P/E and P/B slightly lower than XOP, at 4.36 and 0.51. This one has actually been the biggest winner today, with a gain of 2.3% vs. about 1.4% in the other two ETFs. However, the dividend distribution is quite a bit lower, at about 0.4%.
Perhaps even better than an ETF would be to look at the top holdings of each of these funds and see which have reacted best to the news, and which individual companies have good dividends, valuation, and execution.
