Friday’s ETF To Watch: S&P Small Cap Energy Fund (XLES)

by on February 18, 2011 | ETFs Mentioned:

The energy sector has been in spotlight over the last few years, as prices of oil have skyrocketed to over $140 per barrel, only to fall out hard during the recession. Last year’s Deepwater Horizon Spill surfaced a major issue in safety and oil spill response on drilling rigs, helping to spark further interest in alternative energy sources and lowering our dependence on fossil fuels. Since then, oil markets have calmed down substantially, until of course, Mideast tensions brought the precious commodity back to the forefront of investors’ minds. More recently, President Obama released his 2012 fiscal budget, which outlined less tax incentives for major oil firms, as well as more stringent offshore drilling requirements. For the time being, oil prices are relatively low considering the high prices that consumers are facing at the pump, but numerous analysts are calling for the fuel to hit $100 per barrel in the near future [see also Friday The 13th Special: Three Unlucky ETFs].

While many will look to the Exxons and Chevrons of the world for a broad look at the energy sector, small cap oil firms can offer a more pure play on the American economy and can often provide a more true outlook for North American oil production, especially for those looking to hone in on the U.S. For this look, many will focus on Oil States International (OIS), a small cap energy company that reported their earnings late after the bell last night. OIS is a “a leading manufacturer of capital equipment for deepwater production facilities and subsea pipelines, and a leading service provider to the oil and gas industry, including remote site accommodations, production-related rental tools, oil country tubular goods distribution and land drilling services” according to their website. The company operates in various countries through out the world, but their U.S. operations may take a hit if Obama’s budget proposal passes with enhanced regulations on offshore drilling and the companies who manufacture the equipment, such as OIS [see also 11 Rapid Fire ETF Ideas For 2011].

Analysts have predicted that the firm will bring in EPS of $0.89 with revenues just over the $600 million mark. These figures would represent a 15% growth from last year’s sales with the EPS growing by just over 14% from the same quarter of December 2009. The company has not missed their earnings numbers in over a year, and has predicted a growth of 45% next quarter, spelling good news for its investors. This trend continued late last night as the company reported earnings of 94 cents a share with estimate-beating revenues of just under $700 million, a figure that represents a 31.8% increase year-over-year. This suggests that the energy boom is also trickling down to small caps in the sector and that growth abounds with oil approaching $100/bbl.  [see also Playing Commodities Through Exploration ETFs].

“Year-over-year revenue and EBITDA increased 70% and 134%, respectively, due to our proportionately higher revenue potential on horizontal well completions performed in the most active shale play regions,” stated Cindy B. Taylor, Oil States’ President and Chief Executive Officer. “Oil sands activity remained strong given high occupancy levels at our oil sands lodges. Our offshore products business reported lower year-over-year results given its reduced backlog at the beginning of the period; however, order levels were exceptionally strong in the fourth quarter at $208 million, boding well for second half 2011 and 2012 activity for the segment.”

With this earnings announcement coming after market close yesterday, the news should trickle through equities today, making the S&P SmallCap Energy Portfolio Fund (XLES) the ETF to watch for Friday. XLES tracks the S&P SmallCap 600 Energy Index, which tracks American companies engaged in some aspect of the gas and oil industry and are domiciled within U.S. borders. This fund’s top holding is the in-focus OIS which accounts for 12.4% of the fund, with World Fuel Services Corporation (9.6%), and Seacor Holdings (8.2%) following closely behind. XLES has had an impressive run in 2011, returning over 17%, with a dividend yield of 4.2% and could continue this run given the strong earnings report from OIS and firm oil prices in 2011. More immediately, however, investors should look for XLES to react positively during today’s session and possibly end the week on a very high note.

Disclosure: Photo courtesy of Chad Teer. No positions at time of writing.