Oil is the hottest sector, and Wall Street analysts see upside of up to 48% for favored stocks

Analysts favor Canadian oil companies but also some large U.S. players, such as ConocoPhillips, Schlumberger and Valero

Energy is the best-performing stock-market sector this year. Given today’s strong economic growth and inflation, many believe oil prices could remain at current levels for years or maybe even move higher.

Below are two screens of stocks derived from the holdings of three exchange-traded funds that invest in oil and natural gas companies.

An oil price review

First, here’s a chart showing the price movement of forward-month delivery contracts for West Texas Intermediate Crude Oil CL00 over the past 10 years:

That steep but brief plunge on the chart is April 2020, when demand for oil tanked during the early days of the COVID-19 pandemic, storage sites were full and those holding front-month futures contracts essentially had to pay people to take the oil off their hands.

Oil price expectations from here

So what lies ahead for oil prices?

In a report provided to clients on Feb. 10, analysts at BCA Research said they believe prices will rise over the next decade in the face of increasing demand and declining supplies. Those threats to supplies include government action that curbs fossil-fuel production as well as “climate activism at the board level at major energy suppliers and in the courtroom.”

In other words, the best intentions to reduce carbon emissions can push oil pries higher because alternate energy sources take a long time to be available in sufficient quantity to curb demand for fossil fuels.

The BCA analysts favor long-term exposure to oil through ETFs.

Three energy ETFs

If you agree with the above scenario you might want to consider a broad investment in the sector through one or more ETFs. Here’s a quick look at three of them:

• The Energy Select Sector SPDR ETF XLE tracks the energy sector of the S&P 500 SPX. That’s a group of 21 stocks. This is the only sector of the S&P 500 that is up this year — a total return of 24.4% through Feb. 9, with dividends reinvested. XLE has $35.7 billion in assets and annual expenses of 0.12% of assets. It is highly concentrated, with shares of Exxon Mobil Corp. XOM and Chevron Corp. CVX making up 44% of the portfolio.

• The iShares Global Energy ETF IXC holds 46 stocks, including all the stocks held by XLE. It brings in large non-U.S. companies, such as Shell PLC UK:SHEL SHEL, TotalEnergies SE FR:TTE TTE and BP PLC UK:BP BP. (For the three companies just listed, the first ticker is the local one, the second is the American depositary receipt, or ADR. Many of the locally traded non-U.S. companies listed below also have ADRs.) IXC has $1.8 billion in assets, with an expense ratio of 0.43%. The fund’s largest two holdings are Exxon Mobil and Chevron, which together make up 25.5% of the portfolio

• The iShares S&P/TSX Capped Energy Index ETF CA:XEG holds 20 stocks of Canadian energy producers. It is also heavily concentrated, with the largest three holdings, Canadian Natural Resources Ltd CNQ. , Suncor Energy Inc. SU and Cenovus Energy Inc. CVE making up half the portfolio. The ETF has 2 billion Canadian dollars in total assets, with an expense ratio of 0.63%.

You might wonder why a foreign single-country ETF is included in the list, but Canada stands out with its expansion of fossil-fuel production. The iShares S&P/TSX Capped Energy Index ETF has outperformed the other two ETFs in recent years, while underperforming longer term.

As always, do your own research and form your own opinions about which investments, whether through ETFs or other funds or a combination of those and/or individual stocks, match your investment objectives.

source : Marketwatch