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Does This Energy ETF Have the Juice?

By James Catlin – Mar 28, 2014 at 4:50AM

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Taking a closer look at the components of the iShares U.S. Energy ETF.

Not all energy ETFs are created equal. Based on the securities they hold and their respective percentage allocations, they can achieve very different results. In this first of three articles on the subject, I will dissect the major holdings of the iShares U.S. Energy ETF (IYE 0.29%) to see if it's right for your portfolio.

First, let's talk returns. Since the inception of the fund the IYE has slightly underperformed the Dow Jones U.S. Gas and Oil Index.

DurationIYE Returns as %Index Returns as %
1 Month 2.88 2.92
3 Months 7.71 7.84
6 Months 14.04 14.30
1 Year 25.70 26.14
3 Years 10.79 11.20
5 Years 14.01 14.06
10 Years 13.35 13.81
Since Inception 9.88 10.34

Table created by author with information from BlackRock iShares

Notice the iShares U.S. Energy ETF loses to the Dow Jones U.S. Gas and Oil Index in every category. Compounding this slight underperformance is an annual 0.45% expense ratio. Those small percentages really add up over the long run.

But past performance isn't necessarily a reliable way to predict the future. For a better idea of what the future holds it would be wise to examine the top holdings and see exactly what they have in store. 

While the ETF is composed of 85 different stocks, two names dominate this ETF, composing 34.18% of total holdings. They are ExxonMobil (XOM 0.12%) at 22.20% and Chevron (CVX 1.00%) at 11.98%.

ExxonMobil seems to have stumbled recently following its full-year 2013 results and news that it plans on curtailing capital spending for 2014. Let's take a closer look at the 2013 results and current valuation before we get to the future of ExxonMobil.

In 2013 ExxonMobil earned $32.5 billion, down $12.3 billion or 27% from 2012. Earnings per share decreased 24% to $7.37. Oil-equivalent production was down 1.5%.

Besides the dismal earnings for 2013, ExxonMobil appears to be overvalued compared to industry averages.

MetricExxonMobilIndustry Average
P/E  12.80  10.60
P/S  .96 .62 
P/B  2.35  1.54
Yield  2.70%  4.90%
Sales-5 year growth rate  4.50  10.51

Table created by author with data from The Motley Fool

The metrics show that investors buying now are paying a premium for a lower-than-average yield and slower sales growth.

But it's not all bad news for ExxonMobil, which boasts higher-than-average ROI, ROA, gross margins, and profit margins. This should help insulate the company a bit from the slower than average growth and decreasing capex.

Still, investors purchasing ExxonMobil today are paying a premium for a stock that is offering below-average yields and stagnant EPS growth over the next two years. Not the best investment in my humble opinion.

But could Chevron be the iShares U.S. Energy ETF's saving grace?

Let's start with past performance again. Chevron has been seeing declining revenues and earnings over the past few years. Revenue in 2011 totaled $244.37 billion, in 2012 revenue came in at $235.02, and in 2013 totaled $221.32. That's nearly a 10% decrease in revenue over the past few years. Earnings suffered even more with 2011 EPS at $13.54, 2012 EPS at $13.42, and 2013 down to $11.18. That is a 17.5% decline over the last three years in EPS.

But valuations look slightly more attractive than ExxonMobil's.

MetricChevronIndustry Average
P/E  10.4  10.60
P/S 1.00 .62 
P/B  1.48  1.54
Yield  3.50%  4.90%
Sales-5 year growth rate  0.88  10.51

Table created by author with data from The Motley Fool

While the investor seems to be getting a better deal based on these valuations, the five-year sales growth rate raises a huge red flag, especially if that trend is set to continue into the future and manifest into flat or even declining earnings.

Sadly, analysts believe that is exactly what will happen with FY 2014 EPS seeing only a 1.15% bump over FY 2013 to $11.22, and FY 2015 actually declining 1.00% to $11.16 EPS. So, basically, as with ExxonMobil, we are looking at flat growth over the next couple years if the consensus holds.

The conclusion is an easy one. The two major holdings of the iShares U.S. Energy ETF look to be facing stagnant earnings growth in the foreseeable future. They are also paying less than stellar yields, and ExxonMobil appears overvalued in light of this. Wise investors should hold on this particular ETF for now. 

James Catlin has no position in any stocks mentioned. The Motley Fool recommends Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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