Don't Bet On An Earnings Recovery For Energy ETFs

The Energy Select Sector SPDR XLE is the worst-performing sector SPDR this year and the battle for that dubious distinction is not even close. XLE, the largest equity-based energy exchange traded fund by assets, is down 19.8 percent, more than 2 1/2 times the year-to-date loss incurred by the Materials Select Sector SPDR XLB, the second-worst of the nine SPDRs.

XLE is far from alone in disappointing investors. In a year in which oil futures have tumbled to multi-year lows, plenty of energy sector ETFs are sporting losses on par with XLE's. Some, such as those ETFs tracking the exploration and production and oil services, have been even worse.

Gloomy Year?

Even with energy equities mired in a slump and heading for another year of lagging the S&P 500, contracting earnings mean the sector is not as inexpensive as some investors would like to believe. Energy stocks, broadly speaking, are not really cheap at all. Making matters worse on the energy earnings front is that the analysts tracking the sector are paring estimates for next year, forecasting another potentially gloomy year of earnings growth for the S&P 500's seventh-largest sector weight.

"As the price of oil has fallen, analysts have also lowered earnings estimates for companies in the S&P 500 Energy sector for the fourth quarter. The aggregate earnings estimate for the S&P 500 Energy sector for the fourth quarter has declined by 15% since September 30 (to $7.5 billion from $8.9 billion)," according to a recent FactSet note.

Exxon Mobil Corporation XOM and Chevron Corp. CVX, two of the worst-performing members of the Dow Jones Industrial Average this year. That is just one less-than-encouraging anecdote, but it speaks to the fact that analysts are far from enthused by the energy sector's earnings prospects for 2016.

Revisions

"It appears analysts are pessimistic on earnings for the Energy sector for 2016 as well, based on revisions to earnings estimates. The aggregate earnings estimate for the Energy sector for 2016 has also fallen by 15% since September 30 (to $42.9 billion from $50.7 billion). As a result, the Energy sector is now expected to report a year-over-year decline in earnings of 8% in 2016, compared to an expectation for earnings growth of 9% in earnings back on September 30," notes FactSet.

As FactSet notes, 45 percent of the stocks in the S&P 500 Energy Index have seen 2016 earnings estimates cut by 20 percent or more by analysts following those firms. That means energy is the only one of the 10 sectors tracked within the S&P 500 that is expected to show contracting earnings in 2016.

Exxon Mobil and Chevron have suffered some of the worst negative earnings revisions with rival ConocoPhillips COP being in that glum ballpark as well. ConocoPhillips is XLE's sixth-largest holding at a weight of almost 3.8 percent.