S&P Likes A Pair Of Oil ETFs (XLE, VDE, XOM)

With oil prices as volatile as ever and speculation rising that the Obama Administration may act to release oil from the U.S. Strategic Petroleum Reserve, oil ETFs remain firmly entrenched in the spotlight. Citing higher capital expenditures from major integrated oil companies such as Dow components Exxon Mobil XOM and Chevron CVX, S&P Capital IQ endorses a pair of oil ETFs in recent research note, saying "We see higher capital spending from the integrateds on the upstream side, reflecting cash flow growth and strong oil prices. We also expect continued share buybacks and dividend hikes in 2012." S&P Capital IQ rates the Energy Select Sector SPDR XLE and the rival Vanguard Energy ETF VDE Overweight. Home to 168 stocks, the Vanguard Energy ETF has an expense ratio of 0.19% and $2.2 billion in assets under management. XLE has 45 holdings, charges 0.18% and has $7.6 billion in assets under management. The two funds share nine of top-10 holdings in common. EOG Resources EOG is found among VDE's top-10 lineup, but not among XLE's top-10. XLE features El Paso EP among its top-10 holdings, but VDE does not. Otherwise, both ETFs are heavily allocated to Exxon and Chevron, the two largest U.S. oil companies. Those two stocks account for 36.2% of VDE's weight and over 33% of XLE's weight. Both stocks earn five-star ratings from S&P Capital IQ. "We think the integrateds are also beginning to benefit from major project development in deepwater, LNG and unconventional resources over the last few years, enhancing near-term and long-term production growth visibility. The most apparent stumbling block to production growth appears to us to be the possibility that high oil prices could impact production sharing contracts and lead to lower volumes, as we saw in some cases in 2011," S&P analyst Michael Kay wrote. The firm also applied a four-star rating to ConocoPhillips COP, the third-largest U.S. oil company. S&P is also bullish on independents Apache APA and Anadarko Petroleum APC, rating those stocks with five and four stars, respectively. "S&P Capital IQ equity research also maintains a positive fundamental outlook on the independent exploration and production (E&P) sub-industry, but we remain more heavily weighted toward the large-cap companies, with oil exposure," according to the note. Anadarko and Apache combine for 6.1% of XLE's weight and 4.6% of VDE's weight. While no oil services ETFs were highlighted in the S&P note, the firm did give a five-star rating to Schlumberger SLB, the world's largest provider of oilfield services, and four-start ratings to Halliburton HAL and National Oilwell Varco NOV. Oil services stocks have been punished recently as Schlumberger is down 11% in the past month. Halliburton, the second-largest oilfield services provider, is off 10.2% in that time while NOV is down almost 5%. That trio combines for 8.9% of VDE's weight and 12% of XLE's weight. The Vanguard fund has outperformed the SPDR offering by three tenths of a percent on a year-to-date basis. Both funds yield just over 1.5%.