Thursday’s ETF To Watch: iShares Dow Jones U.S. Energy Sector Fund (IYE)

by on July 28, 2011 | ETFs Mentioned:

Although energy prices have come off their 2011 highs, futures contracts are trading well above their mid-2010 levels with current prices trending near the $100/bbl. mark. This has proven to be pretty good news for energy companies across the board helping many to beat analyst expectations for the most recent quarter. Yet, while many giant oil firms have beaten estimates, earnings are down significantly for many of the world’s largest oil firms, a troubling situation for those who are heavily invested in the sector. For example, ConocoPhillips, which reported earnings earlier in the week, beat consensus expectations but also saw profits drop by 39% largely thanks to asset sales in the year ago period. Meanwhile, other large companies are seeing a decline in overall oil production, a trend that could signal slumping profits in the near future for many of the Western world’s oil majors. Thanks to these conflicting signals, investors will likely look to ExxonMobil (XOM) and its earnings report to set the record straight when the company reports before the bell later today.

XOM, the world’s largest oil firm by market capitalization, looks to give investors EPS of $2.35 on revenues of $121.39 billion for the most recent quarter. This compares extremely favorably to the year ago period in which the company announced profits of $1.60/share on revenues of $92.49 billion. In addition to the top and bottom line figures, investors will likely focus on XOM’s production levels as a way to compare it to the competition in the industry. The firm has spent more than most in the past few years on acquisitions and this has helped the company to raise domestic production levels, an increasingly important trend considering that many foreign governments are shutting Western oil majors out of operations [see all the Energy ETFs here].

Now that emerging markets have major oil companies of their own– PetroBras in Brazil, PetroChina in China and Petronas in Malaysia just to name a few– the demand for Western technology and expertise has been slumping, forcing these companies to get more creative in their search for more supplies. Exxon recently purchased XTO Energy, a major gas production company, and some analysts believe that this purchase– which was for close to $30 billion in stock– has helped Exxon to buck the trend of slumping oil and gas production levels, a key factor that analysts will be on the lookout for during today’s earnings release. In fact, some expect Exxon’s production to rise 12% in the quarter, a level that could further set the company apart from its peers in the space [read ETF Plays For $100 Oil].

Thanks to these favorable trends, many investors are likely very happy with Exxon’s performance so far in 2011 as well as over the last 12 months; the company has gained close to 17% in the year-to-date period and it has jumped by close to 33% in the past twelve months alone. Investors will look for this to continue later today, especially if the Texas-based company can continue to outdo the competition in the oil major space and add to its oil and gas production levels [see Energy ETFs: Global Or U.S?]

Thanks to this key earnings report from one of the world’s largest companies, investors should look for the iShares Dow Jones U.S. Energy Sector Fund (IYE) to be in focus throughout today’s trading session. IYE tracks the Dow Jones U.S Oil & Gas Index which puts nearly one-fourth of its total assets in XOM, suggesting that this earnings report will drive the fund’s performance during today’s trading session. Furthermore, the next biggest holding, Chevron, makes up less than half of Exxon’s position while no other company takes up more than 7% of the fund’s total assets, a situation that should put even more pressure on XOM’s earnings report for IYE’s fortunes.

If XOM is able to beat expectations and carry the oil sector higher, look for IYE to surge on the day, even if oil prices continue their recent slump. If, however, investors get a weak outlook from ExxonMobil or see profits that don’t align with expectations, it could be two straight days of weakness for this popular fund, potentially pushing IYE further towards the $40/share mark [see more charts of IYE here].

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Disclosure: Eric is long XOM.