Thursday’s ETF To Watch: Vanguard Energy ETF (VDE)

by on April 28, 2011 | ETFs Mentioned:

With oil prices once again surging, investors are looking to some of the world’s largest oil companies to help power portfolios gains. Now that earnings season is upon us, many are looking for clues from some of these big names to see if the price of crude has helped to spur these firms to record earnings once again. By some estimates, prices of crude oil are about 20% higher this year in the first quarter than it was in 2010, putting the onus on integrated oil firms to deliver hefty profit increases in their first quarter results. Arguably the most important firm in the sector is ExxonMobil (XOM), the world’s largest integrated oil firm and investors should be able to gain further insight on the impact of higher oil on the sector when the energy giant gives its first quarter report later today. 

The company looks to give its earnings report before the bell today and is expected to have an extremely good quarter. XOM is predicted to report a 55% jump in earnings from the year ago period up to $2.07/share while revenues are expected to rise by 27% or to about $115 billion. “First-quarter earnings for major oil companies are going to be significantly better than a year ago helped not only by higher oil prices but also by a several-fold increase in refining profits,” says Fadel Gheit, an analyst at Oppenheimer & Co. Furthermore, the company just announced a 6.8% increase in quarterly dividends from 44 cents to 47 suggesting that its needs– or possible desire– to hold on to so much cash has declined in the past few months, news that could be cheered by shareholders in the months ahead [use the Stock Lookup Tool to find all the ETFs that have XOM].

In terms of negatives to watch out for in the report, they are few and far between beyond a broad collapse in oil prices or demand for the critical fuel. One issue that could work its way to the forefront could be the recent XTO Energy deal which cost the company roughly $36 billion. The company was a major natural gas producer and gas prices have remained depressed thanks to a massive oversupply in the market, further calling into question the wisdom of this massive deal. Nevertheless, XOM could announce further plans to acquire other fields in North America in order to achieve higher economies of scale in the gas business. However, it is unclear how investors might react to such a situation unless Exxon can soothe investors’ fears over continued weakness in gas prices, especially when compared to the much stronger market in crude oil and its derivatives [Energy ETFs: Six Very Different Ways To Play].

Due to this crucial earnings report, investors should look for the Vanguard Energy ETF (VDE) to remain in focus throughout today’s trading session. The fund allocates just over one-fifth of its total assets to the in-focus XOM while also affording just over 11% the fellow giant Chevron. In addition to these two giants, the fund tracks a number of smaller companies that are engaged in a wide variety of energy-related services such as drilling and equipment, and as such it represents a good cross section of the American energy industry. Thanks to this inclusion of many small firms, VDE should be pretty active on the day and could take its cues from the oil giant based on what XOM sees for the marketplace here in Q2 and the rest of 2011 as well [see more on VDE's fact sheet].

Should XOM be able to match investors’ lofty expectations, the stock could surge higher on the day pulling a variety of other energy names higher as well. If, however, Exxon is unable to match estimates or warn about future profits or regulatory risks, it could seep into the rest of the sector potentially leaving VDE on a weaker footing by the end of Thursday’s trading session [compare VDE to any ETF with our ETF Comparison Tool].

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Disclosure: long XOM.