Skip to main content

Crude Oil and Energy Investing - Where to Now?

Over the last few months, I've moved funds from my cash positions into the energy sector. My strategy is to buy quality at low prices while collecting the dividends as my strategy is long-term (3 to 5 years).

All in, the oil sector looks like a terrible place to invest today. Unless, of course, the company you buy has the financial strength to keep investing in any environment and the track record to prove that it can and will do just that. Which is where Exxon and Chevron come in. These two industry giants have long histories of navigating the oil industry's ups and downs with relative ease. One place to see that is in their dividends, with each having increased their disbursements annually for more than three decades. Clearly, these companies know how to deal with industry downturns while still rewarding investors.

That is largely because they don't focus on short-term gyrations, instead looking to the long-term supply/demand dynamics of the industry. They know that a company has to have the financial strength to muddle through the downturns, often investing during the weakest moments, so that they can thrive during the upturns. To that end, Exxon and Chevron have two of the strongest balance sheets in the energy sector, with financial debt-to-equity ratios in the 0.15 times space -- which would be a low number for any industry. Essentially, they have the financial strength to take on extra debt during a downturn without putting their long-term viability at risk.

That basically means that Exxon and Chevron can outlast smaller players that take on greater financial risks by leveraging up their balance sheets. But this process is taking longer today because of the low interest rate environment. However, there's a good side to this because it is creating a huge opportunity for dividend investors who are willing to think long-term along with Exxon and Chevron. To put a number on it, their dividend yields, at 5.7% and 4.6%, respectively, are near their highest levels over the last 20 years.

An ETF that takes advantage of Exxon and Chevron is VDE, Vanguard Energy. The VDE ETF has an over 39.5% exposure to two of the world's leading oil companies: Exxon Mobile (XOM) and Chevron (CVX), VDE has net assets of $3.41 billion, trades an average of 558,819 shares each day, and charges an inexpensive expense ratio of 0.10%. The blended dividend yield of the ETF was at 3.87% at the end of last week at the $72.19 per share level. The chart below shows the top 10 holdings of VDE.


I am not wildly bullish on the price of crude oil as it approaches $55 on NYMEX futures and $60 on Brent. However, I believe that sector rotation in oil-related shares remains long overdue.

Two other ETFs to consider are FENY and IEZ. 

(Disclosure: I have positions in VDE, FENY and IEZ)

Comments

Popular posts from this blog

California: A Model for the Rest of the Country, Part 2

Part 1 here . On Leaving the Golden State Guest Post by NicklethroweR . Posted on the Burning Platform. The fabled Ventura Highway is all that separates my artist loft from the beach where surfing first came to the United States. Both my balcony and front patio face the freeway at about eye level and I could easily smack a tennis ball right on to the ever busy 101. Access to the beach and boardwalk is very important to a Tourist Town such as mine and I can see one underpass from my balcony and another underpass from the patio. Further up the street are two pedestrian bridges. Both have been recently remodeled so that people can not use it to kill themselves by leaping down into traffic. The traffic, just like the spice, must flow and the elites that live here do not like to be inconvenienced as they dart about between Malibu and Santa Barbara. Another feature of living where I live would have to be the homeless, the insane and the drug addicts that wander this particular...

Proper way to calculate CAGR using T-Sql for SQL Server

After reading (and attempting the solutions offered in some) several articles about SQL and CAGR,  I have reached the conclusion that none of them would stand testing in a real-world environment. For one thing, the SQL queries offered as examples are overly complex or don't use the correct math for calculating proper CAGR. Since most DBAs don't have an MBA or Finance degree, let me help.  The correct equation for calculating Compound Annual Growth Rate (as a percentage) is:  Some key points about CAGR:  The compounded annual growth rate (CAGR) is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time. Investors can compare the CAGR of two alternatives to evaluate how well one stock performed against other stocks in a peer group or a market index. The CAGR does not reflect investment risk. You can read a full article about CAGR  here .  To calculate the CAGR for an investment in a language like ...

Trading / Investing Tips

Fundamentals tell you what to buy. Technicals tell you when to buy. Stick to your system of entry and stops religiously. Use stops and stick to them. When euphoria kicks in, that’s usually a local top. Much of the trading-related news & social media troll boxes are noise. Ignore them. Trades should end in 3 ways: Big Win, Small Win, Small Loss Repeat after me. “The trend is my friend.” Don’t scalp the counter-trend. Keep a trading journal. Determine flaws. Eliminate them. If you open a trade based on a high time-frame signal, don’t self-sabotage and close that trade based on a much lower time-frame signal. Good sleep, proper diet & exercise are just as important for trading as they are for most things in life. Don’t get chopped up trying to trade/scalp sideways price. Expect consolidation after large price movements, not continued volatility. All indicators are using the left side of the chart to try and predict the right side of the chart. Chart the exchange wit...