Obama Opens Offshore Drilling; Oil ETFs Soar

by on March 31, 2010 | Updated April 2, 2010 | ETFs Mentioned:

Earlier today, President Obama announced that he is lifting bans on offshore drilling and oil and gas exploration off the Virginia coast, move likely to renew a heated debate between environmental groups and Big Oil. Obama also announced that he will be expanding lease sales for oil and gas exploration on the Atlantic seaboard. The plan, which will impact offshore exploration through 2017, includes the lease sale of a tract of Atlantic waters 50 miles off the Virginia coast and plans for new seismic studies along south- and mid-Atlantic states that could help pinpoint pockets of oil and gas. That research would guide future drilling decisions on the Atlantic seaboard.

The lifting of the ban on offshore drilling is controversial because it paves the way for the first sale of offshore oil and gas in the Atlantic in more than two decades. Environmentalists have been opposed to offshore drilling for obvious reasons, while numerous groups have supported the initiative as a way to both create jobs and reduce dependence on foreign oil.

Obama also indicated that four pending lease sales in the Chukchi and Beaufort seas north of Alaska would be canceled, and future drilling decisions about the region would only come after rigorous environmental impact surveys. In addition, the plan is seen as a way to help convince the Senate to hammer out a climate change bill which has stalled in Congress as the legislative body focused on health care reform.

Most energy ETFs trended higher on the news, while oil service firms as well as oil explorers seemed to be the main beneficiaries of the new ruling (for more oil ETFs see this Definitive Oil ETF Guide).

You may see more oil platforms in the Atlantic thanks to Obama's decisionSPDR S&P Oil & Gas Equipment & Services Fund (XES)

This ETF has an average market cap of just over $9 billion, focusing on relatively small firms in the energy industry. The fund contains 27 securities which are in the S&P Oil & Gas Equipment & Services Select Industry Index, a benchmark that measures the performance of companies engaged in the equipment and service sub-industry of the energy industry. The fund charges a relatively low expense ratio of 0.35% and has gained almost 80% over the last year.

PowerShares Dynamic Oil Services Fund (PXJ)

PXJ focuses on smaller firms which stand to benefit from increased oil drilling due to their role as service providers for multinational oil companies. The fund’s average market capitalization is about $11 billion, and it has close to 46% of its assets in small cap securities.  Among its largest holdings are FMC technologies (5.7%) and Rowan Cos. Inc (5.3%) both of which are firms that specialize in oil drilling equipment and could therefore see a boost from the new ruling.

Merrill Lynch Market Oil Service HOLDR (OIH)

Up close to 1.8% in mid-Wednesday trading, OIH was one of the best performing ETFs in the energy equities ETFdb Category. Like all HOLDRs, this fund is heavily concentrated into a few names with Halliburton, Transocean and Schlumberger combining to make up 37% of the fund’s total assets.

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Disclosure: Eric is long XES